Property investment – personal ownership vs company ownership
When an individual has found a suitable residential investment property to acquire and it makes commercial sense, the very next question should be … how should the property be purchased?
With the changes to residential property taxation that have taken place over the last few years, in particular the restriction of mortgage interest, considering the optimal structure to acquire investment property is now more crucial than ever.
An initial decision needs to be made whether to purchase the property:
- As an individual
- As a joint owner or via a partnership (often with a spouse)
- Via a company.
In order to assist in the decision-making process it is important to consider the following factors:
- How long do you intend to own the property?
- Will you need the income from the property?
- Are you looking to purchase more investment properties in the future?
- Do you already have an investment company?
Differences between personal and company ownership
This is the simplest method of acquiring and running your property business. Other advantages include potentially lower mortgage interest costs, cheaper ongoing compliance costs compared to that of a limited company, and if you are a basic rate taxpayer or have unused personal allowance, there will not be any restriction to mortgage interest. If you are not intending to hold the property for the medium to long term and there is likely to be a capital gain, personal ownership will avoid being taxed twice on any gain on disposal of the property. Learn more about your tax obligations when selling a property in the UK.
The main disadvantage of personal ownership is that if you are a higher rate taxpayer you will be subject to tax at the higher and additional rates of tax as well your mortgage interest being restricted to the basic rate of tax.
Ownership through a partnership
The profits and losses generated through a property held jointly can be assigned between the two partners at any ratio they agree on. Typically, between spouse’s joint property ownership is allocated 50:50 unless this has been formally agreed otherwise.
Limited liability partnerships (LLPs) are also a popular vehicle when building a property portfolio. Unlike personal ownership, corporate entities can be formed with limited liability (Limited Liability Partnerships or LLPs), meaning the partners agree on a structure whereby their liabilities are limited to the amount they originally put into the business. As such, the tax rates applied are therefore determined by each partner’s marginal rate of tax, which can be up to 45%. Partners should also note that there will be National Insurance implications if profits are extracted, retained, or reinvested.
There are significant planning opportunities when structuring property investments held jointly or through a partnership which can result in income tax and inheritance tax benefits.
One of the main benefits of company ownership is that a company has its own legal identity, meaning third parties form contracts with the company and not directors/shareholders. This means that the company will outlive an individual after death, only ceasing when formally dissolved, meaning owners, directors, and shareholders can change.
Did you know
Through company ownership, the company has limited liability on the debts of the business. The liability is normally limited to the amount paid for the shares of the company unless other agreements were made.
It’s important to note, however, that in some cases a director can be held accountable for the company debt if the company continues to trade whilst insolvent. Unlike sole traders or partnerships, the limit on the shareholder’s liability can be unlimited, potentially leading to them being held personally liable with the risk of private residence/assets being repossessed.
A property investment company is a tax-efficient vehicle to use as a personal ‘money box’ or as an alternative to a private pension pot, this is because:
- The money can be kept in the company until it is needed, without triggering further tax charges
- As the rate of corporation tax is much lower than the top rates of income tax, undrawn profits retained in the company grow more quickly compared to holding and being taxed in your own name.
- Retained profits can be invested in the company’s own name.
- When the funds are required, for example, at retirement, you may be a non-taxpayer or basic rate taxpayer.
- The amounts withdrawn can be planned and controlled to ensure maximum tax extraction efficiency.
Bringing in the family
A property investment company can also be used as a means to provide an income to other family members, in addition to providing an IHT planning structure. Some key advantages of this are:
- You may give shares to family members: this may be done gradually, using CGT annual exemptions.
- You can use the company to maximise efficiency by using multiple personal allowances and basic rate bands. Care should be taken if shifting income to minor children,
- Changes to dividend taxation including the new tax-free dividend band from April 2016 (£2,000 for 2018-19 onwards, £5,000 for 2016-17 & 2017-18) make it attractive to bring in family members as shareholders of investment companies.
- You can provide for expenditure in a tax-efficient way, for example, school or university fees.
- Family members can be encouraged to take an active part in the running of the company.
- Control can gradually be passed down to children or grandchildren.
- Gifts of shares to family members will be subject to CGT and IHT Potentially Exempt Transfers (PETs) and therefore could reduce your taxable estate for IHT purposes.
- CGT holdover relief is available for transfers into certain trusts.
It is important that you consider your long-term objectives, especially Inheritance tax from the outset. When regularly advice clients depending on their situation of the most optimal structure for income tax efficiency as well as longer-term IHT mitigation.
Table of differences
The table below summarises the tax differences between company and personal ownership:
|Individual or partnership owner||Company owner|
|Tax rates||Profits are taxed at the owner’s marginal rate (20%, 40%, or 45%).
Property tax allowance available.
|Profits taxed at corporation tax rate – 19% (to be increased from 2023/24 for companies with profits in excess of £50,000).|
|Payment date of tax||Payments on account due 31 January in the tax year and 31 July following the end of the tax year. If any balance is due then it is payable by 31 January after tax year.||Nine months and one day after the accounting year-end.|
|Loan interest||Relief is given as basic rate reduction – fully allowable if furnished holiday let (FHL)||Amount paid restricted to 30% of profit subject to a ‘de minimis’ threshold of £2m, otherwise allowable in full.|
|Losses||No sideways loss against other income or gains – can only be offset against other rental income or carried forward unless FHL. There may be restrictions if the property is not let on a commercial basis.
Loss ‘cap’ = the greater of £50,000 and 25% of total profits on trading and property for the tax year relating to capital allowances.
|Offset against total profits of the current year and then carried forward. Total profits include chargeable gains.
Loss ‘cap’ = the greater of £5m and 50% of the next accounting period’s profits.
|Extraction of funds||Profits available after income tax or capital gains tax have been levied.||Different methods of withdrawal. Individual must be either a director or a shareholder, or both. May be tax-deductible for company depending on method.
Tax liability for individual will depend on the method and available personal allowances.
|Capital gains tax||Annual exempt amount of £12,300 (‘frozen’ for both individuals and estates until 5 April 2026).
Balance taxed at 18% if basic rate taxpayer; 28% otherwise. 20% on commercial property – business asset disposal relief may be available.
Incorporation is capital disposal for CGT purposes. Incorporation relief, gift relief or ‘hold-over’ relief, and ‘roll-over’ relief may be available.
|No allowances – taxed at 19% corporation tax rate (to be increased from 6 April 2023 for companies whose profits exceed £50,000).
Indexation allowance available, albeit frozen at December 2017.
‘Roll-over’ relief may be available.
|Additional taxes||VAT – none on residential.||Annual tax on enveloped dwellings (ATED) – applies to high-value residential properties, held within a company, that are not let on a commercial basis.
VAT – none on residential.
|Inheritance tax||Properties form part of an individual’s estate.
Business property relief (BPR) does not apply.
|The company itself is not liable.
Shares form part of the individual shareholder’s estate – due on value of shareholding.
BPR may be claimable.
Source: Tax Insider
Each individual’s situation is unique and therefore it is important to take professional advice when deciding how best to structure your property business.