Benefits of property incorporation Landlords can gain income tax benefits when they incorporate their property portfolio into a limited company and claim incorporation relief. Rather than paying income tax on their profits at up to 45%, landlords who own rental properties through a limited company will pay corporation tax on their profits at the lower rate of 19%. Landlords will also pay tax on the dividends they take from their property business. What are the tax benefits of property incorporation? In recent years the government has introduced various tax measures targeting residential landlords in an attempt to support home ownership. These measures tried to deter landlords from purchasing additional properties to make it easier for first-time buyers to compete in the property market. One measure introduced was the 3% SDLT surcharge on purchasing additional residential properties from 01 April 2016. Another measure was the change in mortgage loan interest relief restrictions from 6th April 2017, which increased landlords’ income tax liabilities. This applied to individuals owning residential property, encouraging more landlords to move their properties into a limited company structure. The biggest hurdle with property business incorporation is often the inherent Capital Gains Tax (CGT) liability on any gains that occur when properties are transferred. The transfer of any property by an individual to a company will be deemed a disposal for CGT purposes. A relief available on incorporation enables the gain to be deferred and rolled into the base cost of the shares issued in exchange for the properties. The base costs of the properties themselves are uplifted tax-free to market value on transfer into the company. This reduces any future CGT on the company’s later disposal of those properties. Some of the main tax advantages of property business corporations include: Spreading out tax losses Unlike filing your taxes as an individual, a business can spread out tax losses over time. As the owner of an incorporated business, you can defer your taxes. Business Expense Deductions Expenses in an incorporated property company can be deducted during tax time and equate to significant amounts. Benefit Deductions Incorporated businesses can deduct the benefits they pay employees. Protect Personal Assets As an incorporated business, you’re able to protect your personal assets. Credibility When a company enters incorporation, it is more likely that the property business owner will be taken seriously. Income Flexibility Another tax advantage of incorporation is that you can lower your tax bill by taking income in dividends rather than salary. A property company has more tax advantages, enabling the business owner to maximise the return on their properties over time through tax relief. What are the disadvantages of incorporation? It is a requirement of incorporation relief that all properties of a rental business owned by a landlord must be transferred. This can present problems if a landlord wants to retain certain properties privately or where a family member or the owner occupies a property. The incorporation costs can outweigh the savings, with buying and selling taxes (SDLT and CGT) and conveyancing costs to pay. There are administration costs involved with incorporation to consider. Setting up and running a limited company takes time and the time and effort involved in filing yearly accounts or paying for an accountant. What is incorporation relief? To qualify for incorporation relief, the properties in a portfolio must constitute a business. A landlord owning a single rental property that undertakes little management activity is not sufficient to qualify as a business for the purposes of tax relief. Incorporation relief permits the capital gain to be deferred until such time as the shares in the company are sold, or the property business is wound up. What tax does an incorporated property business pay? An important consideration when looking at the incorporation of properties into a company structure is the taxes to be paid by the business. These include: Stamp Duty Land Tax (SDLT) The transfer of a property portfolio to a company will be deemed to take place at market value. This can represent a significant cost in SDLT, although some relief is available where six or more properties are transferred simultaneously. A property company is subject to a 3% surcharge. Incorporating a property partnership presents pitfalls that need to be carefully considered. Annual Tax on Enveloped Dwellings (ATED) A property business is subject to the Annual Tax on Enveloped Dwellings charge where residential property is £500,000. VAT There is no VAT consideration for the incorporation of a solely residential property portfolio, as residential property is usually exempt from VAT. What are the benefits of buying property through a company? Some of the tax benefits of buying property through a limited company include: Save £1,000s when paying corporation tax Perhaps the main reason landlords choose to form a limited company for their properties is how income is taxed in a company. Corporation Tax is currently at 19% and set to rise to 25% in 2023. This is considerably lower than income tax rates, ranging from 19% to 45%. More mortgage tax relief is available. Buy-to-let mortgages can be expensive, as most property investors will agree. Tax changes in April 2020 meant that UK landlords could no longer deduct mortgage expenses from their rental income and reduce their tax bill. This is not the case for a limited company. Placing properties in a company makes it possible to treat mortgage interest as a business expense, allowing landlords to receive 100% tax relief against their property rental income. Gifting property is easier with reduced inheritance tax Buying a property with the end goal of providing an asset to family members makes a limited company structure a practical choice. Property held in a company gives various opportunities to mitigate inheritance tax. This can be done using trust structures, company shares, and other methods not available to individual landlords.
Benefits of property incorporation Landlords can gain income tax benefits when they incorporate their property portfolio into a limited company and claim incorporation relief. Rather than paying income tax on their profits at up to 45%, landlords who own rental properties through a limited company will pay corporation tax on their profits at the lower rate of 19%. Landlords will also pay tax on the dividends they take from their property business. What are the tax benefits of property incorporation? In recent years the government has introduced various tax measures targeting residential landlords in an attempt to support home ownership. These measures tried to deter landlords from purchasing additional properties to make it easier for first-time buyers to compete in the property market. One measure introduced was the 3% SDLT surcharge on purchasing additional residential properties from 01 April 2016. Another measure was the change in mortgage loan interest relief restrictions from 6th April 2017, which increased landlords’ income tax liabilities. This applied to individuals owning residential property, encouraging more landlords to move their properties into a limited company structure. The biggest hurdle with property business incorporation is often the inherent Capital Gains Tax (CGT) liability on any gains that occur when properties are transferred. The transfer of any property by an individual to a company will be deemed a disposal for CGT purposes. A relief available on incorporation enables the gain to be deferred and rolled into the base cost of the shares issued in exchange for the properties. The base costs of the properties themselves are uplifted tax-free to market value on transfer into the company. This reduces any future CGT on the company’s later disposal of those properties. Some of the main tax advantages of property business corporations include: Spreading out tax losses Unlike filing your taxes as an individual, a business can spread out tax losses over time. As the owner of an incorporated business, you can defer your taxes. Business Expense Deductions Expenses in an incorporated property company can be deducted during tax time and equate to significant amounts. Benefit Deductions Incorporated businesses can deduct the benefits they pay employees. Protect Personal Assets As an incorporated business, you’re able to protect your personal assets. Credibility When a company enters incorporation, it is more likely that the property business owner will be taken seriously. Income Flexibility Another tax advantage of incorporation is that you can lower your tax bill by taking income in dividends rather than salary. A property company has more tax advantages, enabling the business owner to maximise the return on their properties over time through tax relief. What are the disadvantages of incorporation? It is a requirement of incorporation relief that all properties of a rental business owned by a landlord must be transferred. This can present problems if a landlord wants to retain certain properties privately or where a family member or the owner occupies a property. The incorporation costs can outweigh the savings, with buying and selling taxes (SDLT and CGT) and conveyancing costs to pay. There are administration costs involved with incorporation to consider. Setting up and running a limited company takes time and the time and effort involved in filing yearly accounts or paying for an accountant. What is incorporation relief? To qualify for incorporation relief, the properties in a portfolio must constitute a business. A landlord owning a single rental property that undertakes little management activity is not sufficient to qualify as a business for the purposes of tax relief. Incorporation relief permits the capital gain to be deferred until such time as the shares in the company are sold, or the property business is wound up. What tax does an incorporated property business pay? An important consideration when looking at the incorporation of properties into a company structure is the taxes to be paid by the business. These include: Stamp Duty Land Tax (SDLT) The transfer of a property portfolio to a company will be deemed to take place at market value. This can represent a significant cost in SDLT, although some relief is available where six or more properties are transferred simultaneously. A property company is subject to a 3% surcharge. Incorporating a property partnership presents pitfalls that need to be carefully considered. Annual Tax on Enveloped Dwellings (ATED) A property business is subject to the Annual Tax on Enveloped Dwellings charge where residential property is £500,000. VAT There is no VAT consideration for the incorporation of a solely residential property portfolio, as residential property is usually exempt from VAT. What are the benefits of buying property through a company? Some of the tax benefits of buying property through a limited company include: Save £1,000s when paying corporation tax Perhaps the main reason landlords choose to form a limited company for their properties is how income is taxed in a company. Corporation Tax is currently at 19% and set to rise to 25% in 2023. This is considerably lower than income tax rates, ranging from 19% to 45%. More mortgage tax relief is available. Buy-to-let mortgages can be expensive, as most property investors will agree. Tax changes in April 2020 meant that UK landlords could no longer deduct mortgage expenses from their rental income and reduce their tax bill. This is not the case for a limited company. Placing properties in a company makes it possible to treat mortgage interest as a business expense, allowing landlords to receive 100% tax relief against their property rental income. Gifting property is easier with reduced inheritance tax Buying a property with the end goal of providing an asset to family members makes a limited company structure a practical choice. Property held in a company gives various opportunities to mitigate inheritance tax. This can be done using trust structures, company shares, and other methods not available to individual landlords.
