Should you buy residential property in your name or via a company to reduce tax?
20/04/2012
It's a pretty common question, and is something that should be considered well before you actually buy any property (or even exchange contracts). Note that what we're mainly considering here is the case where someone is buying property to either renovate and sell on or to hold as a buy to let.
If you're just buying property that you will occupy as your main residence, you should almost always buy it in your own name. Why? Well if you're occupying it as your main residence you'll be able to obtain principal private residence ('PPR') relief on a future disposal, which will ensure that any profit you make on the disposal is free of tax.
Aside from this one of the key issues will be whether you would intend to sell developed properties or retain them long term to generate capital growth and rental returns.
In either case the initial consideration will be whether to hold the property via a company or personally. You should generally avoid 'mixing' these. For example, one possible option would be to buy property personally, develop it and then transfer it to a wholly owned limited company which would rent the property out.
This should generally be avoided. If you hold the property in your name, develop it and then transfer to a company, the transfer would be a chargeable disposal for income tax/capital gains tax purposes. The market value of the properties would be likely to be used and any profit/gain would be likely to be taxed on you personally. This could be the case even though the property would then be held by the company long term.
Therefore ideally you would look to establish the correct structure for holding the property from the outset, and either hold personally or transfer the property pre development to the company.
If you were looking to develop properties, any profits would be assessed to income tax. On this basis, and assuming you would be retaining most of the profits within the business, with minimal extractions (ie retaining cash in the business for future use) it would be likely to be more tax efficient to use a company to conduct the trade.
If you carried out the trade personally, you would be taxed at 20%/40%/45% on the profits generated when you sold each property. If the profits were significant this would be predominantly at the 40% or 45% rate of income tax. This would apply irrespective of whether the proceeds was reinvested into further development properties or not. In addition you could be subject to NIC, at a rate of 9% up to the higher rate tax band, and 2% on additional profits.
By contrast, if you were to use a company, the company could earn profits of up to £300,000 pa and pay corporation tax at 20%.
It's worthwhile noting that if you own any other companies this £300,000 limit is reduced according to the number of companies. For example if you owned one other company the 20% tax band would be reduced to £150,000.
In this case if annual profits would be above this, it may be worthwhile to consider simply carrying out both trades from one company, particularly if the profits of one of the companies is very low. This would then increase the 20% tax band to £300K.
The company would not be charged to NIC on the profits but as the company is a separate legal entity you would need to extract cash from the company. If you had provided funds to the company as a loan on the start up you could extract amounts up to this free of income tax and NIC. You could also consider taking cash as a dividend to utilise any basic rate tax band, again effectively free of income tax.
If you were looking to retain properties long term and benefit from capital growth and rental income, keeping them in your name would be likely to be preferable. In this case you would be classed as a property investor rather than a property trader and the reliefs under CGT for personal as opposed to company ownership would be greater. In addition the tax rate for private investors is now set at 18% or 28% (depending on whether you are a higher rate taxpayer or not).
This means that personal ownership will lead to a tax increase of around 8% for most people however this ignores the fact that company owners need to get the profits out of the company. Extracting profits is subject to income tax (at 25% if within the higher rate tax band).
It's also worth bearing in mind that if the gain on disposal exceeded £300K the company would then pay tax at a marginal rate of 21% on the gain above £300K.
Individual owners also have the annual CGT exemptions to offset which are currently £11,000 each. So if you owned with your spouse that's an extra tax deduction of £22,000. A company is only entitled to relief for inflation.
If you used a company to hold investment properties the gains on a future disposal would be higher, and you would then have the problem of extracting the large disposal proceeds (unless the proceeds were retained in the company).
This assumes that the key consideration would be capital growth. As an investor you would also obtain rental income, which would be likely to be taxed at 20%/40%/50%. In any case if the properties are highly geared any rental profits would be unlikely to be significant after the mortgage interest was deducted.
Therefore when considering whether to purchase via a company or personally as a first step you should ensure that you carefully consider the nature of your property activities and whether they will be classed as trading or investment.
Update
You should also consider the impact of the new ATED provisions (including 15% SDLT and a CGT charge). As from 2016 the threshold for these rules to apply is reducing to property valued at over £500,000. See the members area for more information on this
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
Disclaimer
i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. Th