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Deciding on whether it would be beneficial for a property investor to use a Limited Company can be quite complicated.

A lot will depend on your personal circumstances but also on what type of property business you are engaged in. For example if you buy property to renovate and then sell on at a profit you, or your company, would be “trading in property”. This means that as an individual you would pay income tax and as a company you would pay corporation tax on the profit made when you sell the property.

However if you buy property with a view to renting it out – renovated or as bought – then you are not trading in property. You are in the business of “renting of own property”.  In this case as above an individual pays income tax and a company pays corporation tax on the profit from rental income, but when the property is sold an individual pays Capital Gains Tax on the profit but a company just pays corporation tax as normal.

Sounds simple doesn’t it. Unfortunately it isn’t. Here are some of the key advantages and potential problems in structuring your property business via a limited company.

  1. Low Tax Rates – on profits up to £300k small limited companies pay tax at 21% rising in stages as they make more profit to a top rate of 28%. By contrast an individual who made £300k profit would be taxed at 40%. This is highly advantageous if you are developing property but possibly less advantageous is you sell a property which had been owned as part of a rental portfolio as, since April 2000, an individual would pay only 18% as Capital Gains Tax.
  2. Company money box – By leaving money in the company and reinvesting, the tax savings can be used to grow property portfolios at a much faster rate. Property development in particular is a trade and liable to income tax as opposed to capital gains tax and so can be better off in a company. However in the longer term you do still have to consider how you are going to extract your funds in a tax efficient manner from the company, which may incur a further tax charge down the line.
  3. Use of Dividends – by using a limited company profits can be paid out in the form of dividends which avoids any type of national insurance payment. You can also time the taking of dividends to when you want them and so avoid going into personal higher rate tax bands by leaving the money in the company.
  4. Ownership transfers – a property held in a company could be transferred more easily by means of share transfers rather than actual property transfers and also saves on stamp duty payments. 0.5% for shares against as much as 4% stamp duty land tax.
  5. Property Management Companies – sometimes a Limited Company is not wanted to hold the property but as a property management company to be used instead to manage the property and divert income into it instead and so save tax.
  6. Limited Liability – it’s not just about the tax savings. Building sites can be dangerous places and tenants can have accidents. A limited company will limit the amount of your liability in these cases.

Whether a limited company is right for your property empire will depend not only on the present circumstances but your plans for the future. You need to get appropriate specialist advice from an accountant or other professional advisor who can look at your personal circumstances.

James Green & Co can advise you on the best vehicle for your property investment. Click here to contact them.

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