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Property business – company or not?

This article is the seventh in a series in which we focus on property issues in our bi-monthly e-newsletter for individuals and their families, Pathfinder – personal tax and wealth (sign up here). This section of the e-newsletter explores the most common property tax issues our clients are asking us about. Whether a landlord, or simply someone looking to utilise property as an investment for their (and their family’s) future, this series will seek to advise you on your options, and prevent you from falling foul of any unforeseen tax implications!

In this article we consider the benefits of holding a rental property business personally, or via the use of a limited company…

Recent updates to the rules for landlords of residential property have raised an increasingly common question - should a rental property business be held personally, or via the use of a limited company?

Higher and additional rate taxpayers paying income tax at 40% and 45% respectively have seen the phased introduction of restricted tax relief on mortgage interest payments. This takes full effect in 2020/21 and results in relief only being available at the basic rate of tax, being 20%.

On the other hand, a property business within a limited company currently sees no equivalent restriction, with mortgage interest deductible from property profits in full. In addition, a company pays a lower rate of tax than an individual with corporation tax currently set at a rate of 19% (expected to decrease to 17% by April 2020).

Although this seems like a great tax saving, one of the drawbacks of a company is the additional compliance cost that a company brings, and this should be weighed up against the tax savings. Also, the tax costs of extracting profits and gains needs to be considered.

A limited company is likely to be most beneficial when considering the succession of the property business as it opens up further tax saving opportunities and allows future flexibility. For example, instead of gifting an interest in one or more properties one could gift shares in the company holding the properties.

Not only does this make it easier to control the value given, but it could result in inheritance tax savings due to the share valuation being discounted where there is a minority shareholding. Any growth of the shares gifted would then take place outside of your estate. There is also the possibility of having different share rights for different shareholders which could mean a more significant level of value is attributed to the younger generations.

Aside from tax, an advantage of a company is that it affords limited personal liability for the landlord, unlike personal ownership.

Whilst a limited company could well be the optimal position for a property rental business, with a larger business seeing larger benefits, there are tax costs associated with transferring an existing property business into a company and therefore each case should be reviewed carefully.

For further information please speak with your usual Kreston Reeves adviser here, or contact Jo White here or on +44 (0)330 124 1399 who would be pleased to have a no-obligation initial meeting with you.

Look out for the next property focussed article in October’s edition of Pathfinder – Personal tax and wealth update. To sign up to receive this complimentary bi-monthly newsletter, and other Kreston Reeves publications/event invitations, please click here. There is also the option to subscribe to receive our exclusive ‘property and construction’ sector updates, events and webinars for those with particular interest in this sector.

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