The Growing Trend of Property Incorporation
An increasing number of landlords are opting to manage their property investments through limited companies. This shift is largely driven by the widening gap between corporate and personal tax rates and the ability for companies to fully deduct finance costs. Furthermore, the upcoming removal of tax benefits for furnished holiday lettings is prompting many landlords in that sector to reevaluate their business structure. But is incorporation the best path forward?
Main Advantages of Operating Through a Company
1. Reduced Corporation Tax Rates
Corporation tax is currently capped at 25%, notably lower than the 45% top rate of income tax for individuals. This difference can lead to significant tax savings on rental income for landlords using a company structure.
2. Full Mortgage Interest Deductibility
Unlike individual landlords—who face limitations on mortgage interest relief—companies can deduct the full amount of interest and finance costs, regardless of the type of property.
3. Preferable Capital Gains Tax Treatment
Gains made within a company are taxed under corporation tax rules, often resulting in a lower effective tax rate compared to the 24% capital gains tax faced by individuals on residential properties. Companies also benefit from longer timeframes for settling their tax obligations.
4. Protection Through Limited Liability
A company structure offers a layer of legal protection, typically shielding personal assets if the business encounters financial difficulties.
Potential Drawbacks of Incorporating
1. High Costs of Transferring Existing Properties
Moving personally owned properties into a company can be costly. The process triggers Stamp Duty Land Tax (SDLT) and is treated as a sale at market value, potentially resulting in a capital gains tax bill.
2. No Personal Tax-Free Allowances
Unlike individuals, companies don’t enjoy personal tax allowances or an annual exemption for capital gains. All profits and gains are fully taxable.
3. Complex Profit Extraction
Accessing company profits for personal use involves additional tax considerations. Whether taken as a salary, dividend, or other method, further income tax and National Insurance charges may apply.
4. Greater Administrative Responsibilities
Running a company involves more compliance obligations, including the submission of annual accounts and corporation tax returns, which can increase both the workload and costs.
The Verdict: Crunch the Numbers First
Incorporation can offer meaningful tax and legal benefits, particularly for landlords with larger portfolios or substantial borrowing. However, these must be carefully balanced against the potential costs, tax implications, and administrative complexity.
Before deciding, it’s crucial to assess both the tax position of the company and the implications of withdrawing profits for personal use. Seeking professional advice and conducting a detailed financial analysis is highly recommended.
Reference Note: ITTOIA 2005, Part 3; CTA 2010, Parts 2 and 3A.
