There are different types of company but the one most commonly used for property tax planning is the private company limited by shares.
Shareholders are the owners of the company, which is administered by directors (who may also be the shareholders). There are advantages and disadvantages of a company owning property. Although companies do not have a personal allowance, if the profits from a property business owned by individual(s) are charged at the higher personal tax rates, it could potentially be more beneficial for the properties to be owned by a company. The corporation tax rate is lower at 20% for 2016/17. However, once this tax has been paid, there may be a further tax cost when the shareholder makes any withdrawals.
From April 2017, tax relief on interest paid on loans by individual property investors will be restricted such that by 2020, interest will not be a fully allowable expense but will only attract tax relief at 20% as an income tax reduction. These new rules will not apply to interest on loans incurred by companies.
Unless losses are incurred on sale, it is usually preferable for the property to be held personally or via a joint/partnership investment, rather than being held within a company. Individuals are allowed an annual exempt amount on sale and may be charged a lower effective rate of capital gains tax than the tax rates charged on company profits.
Other relevant points:
- A limited company is a separate legal entity from the shareholders.
- Profits and losses belong to the company.
- The company can continue regardless of the death, resignation or bankruptcy of the shareholders or directors.
- The liability of shareholders is limited to the amount unpaid (if any) on the shares held.
- If the company fails, the shareholders are not normally required to make good the deficit (unless personal guarantees have been given).
- A company may find it easier to raise finance.
This tip was first printed in Property Tax Insider in November 2016.