By Louise Misiewicz
Are you interested in buy-to-let property investments?
Have you considered the best structure for your business?
I was chatting to a new property investor client last week, and they were unsure which structure was better for them in terms of running and managing their buy-to-let property business.
Some of my clients opt to manage their buy-to-let properties under a personal setup, whilst other investors choose a company structure instead. It all depends on their preference and the property tax advice we give.
When it comes to managing your buy-to-let property business, it’s worth considering if the structure you have in place is serving you well and giving you the maximum allowances and highest financial return.
How do personal vs company structures compare for buy-to-let investment?
According to my team of property tax specialists, there are benefits in both personal and company structures when managing buy-to-let property investments. The choice of whether to opt for a personal or company structure is a personal one, and will be different with each investor based on their situation.
As I’ve mentioned, the choice is down to each property investor, and it’s worth sitting down with myself and my team of property tax experts to discuss the various buy-to-let options. Get in touch here.
Some of the basic but important differences for a buy-to-let property business between a personal and company setup include the following elements:
- Income Tax for personal investors – buy-to-let properties held personally are taxed on profits at a marginal tax rate of up to 45%, regardless of when the money is withdrawn from the business.
- Corporation Tax for companies – a buy-to-let property company will operate with letting as a business for corporation tax purposes, with profits being taxed at the current corporate tax rate of 20%.
- Tax on disposal of the property for a UK resident – this is subject to capital gains tax (CGT) at between 18-28%, after deducting any available annual exemption. The lower rates of CGT (either 10% or 20% ) introduced in April 2016 do not apply to the disposal of residential property.
- Tax on disposal of the property for companies – an allowance is available to companies, although tax due is at corporation tax rates.
- Extracting funds from a company – there is a potential double tax charge when profits extracted as dividends by higher rate taxpayer, or by basic rate taxpayer. Individuals, however, can receive £5,000 dividends tax-free regardless of other income.
- Ownership of properties held personally – the maximum number of legal owners of property is restricted to five. Individual investors will need to decide whether to hold property as joint tenants, or tenants in common, and also to consider the effect on joint tenants of changing beneficial interests in the property.
- Ownership in companies – a company, on the other hand, may have multiple shareholders.
- Annual Tax on Enveloped Dwellings (ATED) for personal investors – there is no exposure to ATED charge.
- Annual Tax on Enveloped Dwellings (ATED) for companies – ATED applies to high value residential properties held by a company, however there is an exemption from the charge when the property is let on a commercial basis. The ATED charge is also payable if the letting business ceases.
- Stamp Duty Land Tax (SDLT) for personal investors & company investors – this is charged on purchase, and a 3% premium applies on the purchase of an additional residential property.
- Inheritance Tax (IHT) for personal investors – Business Property Relief (BPR) is unlikely to apply in respect of let property, as it is considered to be an investment asset. Beneficiaries of the estate on death will receive the property at market value, so there would be no CGT for them to pay on a sale.
- Inheritance Tax (IHT) for companies – IHT Business Property relief will not apply to shares, unless the company has significant other non-investment activities.
There are other consideration to bear in mind when considering whether to structure your buy-to-let business as a personal business or via a company setup. The information above is just an introduction.
For more discussion on the details, I recommend that it’s worth getting in touch with me directly.
What is the best way forward for your buy-to-let business?
I’ve written the following articles which will provide useful additional information around setting up and running a buy-to-let property business, whether as an individual or as a company:
- Tax free investment benefits of REITs
- Property investment for high-rate taxpayers
- Considerations when starting a Limited Company
- ATED on residential properties owned in a company
- Incorporation and SDLT/CGT relief
- Using property losses to reduce tax liability
How to engage with us
If you want to understand how to implement the elements raised in this article or to discuss other finance/tax questions then please book some time with us using the below calendar.
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If you are looking for a new accountant, then please book some time with us using the below calendar.
Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.