What are the basics of a property investment company?
This article is perfect for anyone setting up a property investment company for rental income.
As property accountants & Property Tax consultants serving thousands of UK landlords that purchase buy-to-let properties, we know that choosing the right property tax structure is essential for our clients. A property investment company should be set up with care.
Private sector businesses account for 35% of the UK’s companies, with over one million in London alone.
More than four million Limited Companies are registered in the UK, with over 500,000 new companies incorporated annually.
A property investment Company is simply a Limited Company.
Private Limited Companies can also be called PLC. This is not to be confused with Public Liability Company (PLC).
There are different types of Limited Companies, including Limited Liability Partnership (LLP) and Special Purpose Vehicle (SPV).
Limited Companies pay Corporation Tax on their profits at 19%, which is set to increase to 25% from 2023.
Corporation Tax is paid on total profits minus allowable business expenses. A property investment company pays corporation tax on the profits made.
Limited Companies do not pay income tax or national insurance and are separate from the owners, directors and shareholders.
In the UK, all Limited Companies must be registered at Companies House, and the information about Limited Companies is held on a public register available for anyone to see.
No restrictions exist on who may use a Property Investment Company business structure.
Limited Companies in the UK can include hairdressers, cafes, restaurants, manufacturers, and property-related activities such as property investments and property developers.
Choosing a company name for your property investment company
A company name for your property investment company
Your name can’t be the same as another registered company’s name — search the Companies House register to see if a name’s been taken. Your name also can’t:
– contain a ‘sensitive word or expression unless you get permission from the Secretary of State
– suggest a connection with government or local authorities
– be offensive
You can trade using a different name to your registered name. This is known as a ‘business name’.
Business names mustn’t:
– include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company or ‘plc.’
– be the same as an existing trademark
– contain a ‘sensitive word or expression unless you get permission
Your name must be unique — it can’t be the ‘same as’ or ‘too like’ an existing name.
‘Same as’ names
‘Same as’ names are those where the only difference to an existing name is:
– a particular character, e.g., the ‘plus’ sign
– one or more words listed in the guidance on naming
‘Hands UK Ltd’ and ‘Hand’s Ltd’ are the same as ‘Hands Ltd’. ‘Box.com Ltd’ is too similar to ‘Box Ltd’.
When you don’t have to use ‘limited’ in your name, the names of most private limited companies in the UK must end in either ‘Limited’ or ‘Ltd’.
You will use the name of the property investment company when you set up a business bank account with Tide.
How to structure your property investment company?
A property investment company is simply a limited company. This is important to know if you are setting up a new limited company for rental property for the first time and unsure what to do. You may hear them called by different names, such as
– Limited Liability Company, also known as LLP
– Private limited company also is known as PLC. This is not to be mixed up with Public Liability Company (PLC)
– Special Purpose Vehicle, also known as SPV
A property investment company is a legally separate entity from you. This means any legal responsibilities are on the limited company and not the people associated with the limited company. There are times when a limited company director waives rights to be held legally responsible for the dealings of a limited company. This is rare.
It is not a simple matter of thinking of a name and starting a property investment limited company. It is that easy, but there are significant tax consequences for not considering the tax-efficient tax structure.
A company will have a name. Knowing what the name means and what it relates to is essential. Your limited company will need a home, also known as a registered office.
Shareholders of a property investment limited company
The shareholders of the limited company are their owners. They may or may not work within the company. Shareholders receive dividends when the private limited company makes money. They also risk that their capital could be lost if the business does not do very well. Shareholders are responsible for appointing a limited company director, who in return is responsible for hiring and firing employees.
Property investment Limited company share structures
It is vital that you set the property investment limited company up with the right tax-efficient shareholder structure.
There are different types of shares that you can create
– Preference shares
– Ordinary shares
– Alphabet shares
Preference shares for the property investment company
are usually used when you wish to own the business, but you want a guaranteed form of income. You will agree on an amount to invest in a limited company. You will also decide on the % return that you want each year
Ordinary shares for the property investment company
This is the most common format of shares within a limited company. You agree with the value of each share and how many shares each person will pay for. The greater the number of shares, the more significant ownership the person has in the limited company.
Alphabet shares, also known as a SMART company structure
Mistakes are often made by allocating “Ordinary” shares to the shareholders. This means that dividends are taken out of the company based on the number of shares issued. This leads to tax nightmares. It is much better to distribute A, B, and C shares to shareholders so that dividends may be taken out of the company in the most tax-efficient way.
You may have come across terms like SMART companies. You may have also heard of Family Investment Companies (FIC). Rest assured that they are just limited companies as is a property investment company.
These are very similar to ordinary shares. The reason why I specified them is for the flexibility for the payment of dividends. Let us imagine that Sarah and John started a limited company with 50 X £1 ordinary shares each. An ordinary shareholder must take out the same £X dividends per share. Sarah and John would need to share £20,000 dividends between them.
John is a tax-high taxpayer, and Sarah does not work. John gets his first £2,000 dividends tax-free. He pays 32.5% income tax on the remaining £8,000 dividends. Sarah receives the £10,000 tax-free as it falls below her £12,500 personal allowance.
It would have been beneficial for John to have an A-class share and Sarah to have a B-class share. That way, John could be paid £2,000 dividends, tax-free. Sarah would be paid £12,000, which still falls below her personal allowance and is tax-free.