Summary of tax payable
There are a number of factors to consider when deciding whether to carry on your property business through a limited company or to transfer your business to a limited company, rather than as an individual through self-employment or a partnership.
The table below provides a comparison between the taxes paid by each entity:
|Tax on Profits||19%||40%*||40%*|
|Tax on Gains||19%***||28%*||28%*|
|Extraction of funds:|
|Dividends||7.5% / 32.5% / 38.1% /||NIL||NIL|
|Salary/bonus||20% / 40% / 45%|
|Stamp Duty Land Tax**|
|Up to £125k||3%||3%||3%|
|£125 to £250k||5%||5%||5%
|£250 to 925k||8%||8%||8%
|£925 to £1.5m||13%||13%||13%
|Inheritance tax||40% on value of|
|40% on value of|
|40% on partnership
* based on the individual being a higher rate tax payer, will be at marginal rates if basic rate or additional taxpayer.
**these rates assume that the individuals involved already own their own home and therefore the investment properties are additional properties.
*** or 28% if within ATED
Other matters to consider
Interest relief – Companies continue to receive a full tax deduction for interest paid on any financial loans. Individuals will have their interest relief restricted from April 2017 and will only receive basic rate tax relief from April 2020. This will not apply to individuals who own furnished holiday lettings.
Cost – A limited company will need to file formal accounts to Companies House each year as well as a corporation tax return to HMRC which is more costly.
Annual Tax on Enveloped Dwellings – This is an annual tax payable by a company if it owns residential property. There is currently an exemption where the properties are let on a commercial basis, however care will need to be given if any properties are used by family members.
Incorporating a property business
There are two ways to incorporate a property business, either sell the properties to the company or exchange the property business for issue of shares in the company.
In both scenarios the main taxes you need to consider when incorporating a property business are: Capital Gain Tax and Stamp Duty Land Tax. Furthermore, the implications can be different depending on the current business structure.
A summary of the implications are:
|Capital Gains Tax (the rates are 10/20% for commercial property)||18/28%||18/28% (subject to incorporation relief (see below)||18/28%||18/28% (subject to incorporation relief (see below)|
|Stamp Duty Land Tax
|up to £125k||3%||3%||3%||NIL|
|£125 to £250k||5%||5%||5%|
|£250 to 925k||8%||8%||8%|
|£925 to £1.5m||13%||13%||13%|
The relief allows you to incorporate a business with no capital gains tax payable. This is providing the current owners receive new shares on a pro-rata basis, as the gains are rolled over into the value of the shares you receive in exchange for the business. It’s worth noting that gains may arise as a result of the shares being sold or gifted in the future.
You will have to meet specific criteria. Consequently, this can prove difficult for some property businesses as you need to be able to clearly demonstrate that you are running a property business and not just holding the properties as passive investments. The indicators which HMRC will consider when determining if the relief is available are:
• Number of properties
• Management of properties (use of agents etc.)
• Time spent running the business
• Maximising rental returns
Failure to meet the required criteria will result in the relief being denied and tax payable.
Stamp Duty Land Tax
There is an exemption in the legislation which allows for a partnership business to incorporate where the partners are mirrored as the shareholders in the company.
Again it does require a property business to be in operation, and joint ownership will not be sufficient.
Please note that this factsheet is for general information purposes only. You should seek professional advice before you take any action or refrain from as a result of information contained herein. Date created: 29.6.18