The Negotiator website contains an article highlighting the benefits of purchasing new investment properties in a limited company.
The article explains that changes to the taxation of landlords announced in the Autumn Statement last year will lead to personal allowances linked to Capital Gains Tax (CGT) reducing over the next two years.
When an individual sells an investment, liable for CGT, until recently owners could exercise a personal allowance of £12,300 per owner before CGT was applied to any profit.
The profit is determined by the following calculation:
- The final sale price
- Less the price it was purchased for by that owner
- Less certain related costs linked to the purchase and sale
- Less any personal allowances
CGT is calculated on the net balance and the rate paid is determined by the related tax bandings of the owners. For a 25% taxpayer then currently a CGT rate of 18% will apply and this increases to 28% if they are a higher rate taxpayer.
From April 2023 the personal allowance was reduced by to £6,000, and again to £3,000 from April 2024. The result is that landlords will have less profit that will be free of tax.
Benefits of a limited company
The article suggests that people looking to invest in a second property may be better placed to purchase as a limited company rather than as private individuals.
Limited companies usually pay tax at lower rates on rental profits than individuals. Company property rental profits and residential property CGT are taxed at corporation rates currently 19-25% based on a tapering scale from £50,000 to £250,000. Corporation tax can be significantly less than the 28% a landlord will pay if they owned the property personally and were a higher rate taxpayer.
A further advantage is that limited companies can still fully claim mortgage interest relief on any related loans, a benefit that was withdrawn from landlords owning investment properties in their own names.
The article explains that there is also no personal income tax liability on company rental profits, which are reinvested in mortgage capital repayments, property improvements or acquisitions. Income tax only applies to profits that are extracted for personal use.
For landlords who already personally own rental property, the transfer of a property to a limited company is more challenging.
They can sell the property to their limited company, but the sale will be subject to CGT based on current market values any property transferred, and not the original purchase price.
Also, any sales are subject to stamp duty at the enhanced rate because they are second properties and not a main residence. Although there could be major upfront costs the tax bill when the property is re-sold and the annual tax benefits up until that point could be more advantageous.
Any landlord considering major financial transactions should always seek advice of an accountant or a qualified individual.