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Property investment - personal or company ownership

Shared from Tax Insider: Property investment - personal or company ownership
By Jennifer Adams, January 2022

In this sample excerpt from the newly updated guide 'Investing In Property - Personal or Company Ownership', Jennifer Adams looks at what important tax considerations should be made when investing in property. Learn more about this popular tax saving report and save 30% today.

Direct investment in property can be undertaken within a variety of structures, the more common being as an individual (or partnership) or as an investment company limited by shares. Other options include the use of a limited liability partnership (LLP), a trading company or a pension scheme. 

Although recent years have seen several changes to the taxation of property, those changes have been in respect of residential property rather than commercial; the exception being the extension of the capital gains tax regime to include non-resident landlords owning UK commercial property as from 6 April 2019. The following section compares the differences between investing as an individual purchaser or partnership (including LLPs) as opposed to investing as a shareholder in a company that buys the property (an investment company).  

Differences between individual and company ownership 

  • Taxation  

There are several reasons why a property investor might use a limited company rather than purchase property in their own name (or in partnership). One of the main reasons relates to the differences in taxation rates. The method of calculation for VAT or stamp duty land tax (SDLT) is the same whether it is an individual (or partnership including an LLP) or a company purchase. An important difference is in the treatment of mortgage or loan interest. Otherwise, the main difference is evident when the time comes to take monies out of the business.  

  • Legal identity 

A company has its own legal identity such that third parties contract with the company and not the individual directors or shareholders. A separate identity enables a company to survive the owner's death and there is also the added flexibility for directors or shareholders to change. A company's existence will only cease when it is formally dissolved.  

Another important reason for using a company is that companies have limited liability for the debts of the business, the extent of the liability being the amount paid for the shares plus the unpaid amount on any nil or partly paid shares (if any). In practice, the liability is usually restricted to the amount paid for the shares unless any personal guarantees have been given. However, in certain cases, a company director can be held personally responsible for the debts of the company when the company continues trading whilst insolvent. This limit on the shareholders' liability contrasts with sole traders or partnerships where there is the potential for unlimited personal liability (e.g. the individual's private residence is at risk of being repossessed).  

Partnerships 

The rental profit or loss incurred on a property held jointly (or held within a partnership proper) need not be allocated in the same proportion as the underlying ownership. Where a genuine partnership exists, the profits and losses from that business can be allocated between the partners in any ratio that the partners agree, and that ratio may be varied from year to year. Usually, joint property ownership between spouses is allocated 50:50 unless the underlying ownership of the property is different.  

As mentioned before, the liability of an individual or partnership can be unlimited. However, partnerships can be created with limited liability. This allows for a partnership structure but where each partner's liabilities are limited to the amount they put into the business. 

Limited liability partnerships (LLPs) are a popular vehicle for holding a property portfolio. They are not partnerships as such but corporate entities sharing most features in common with companies (i.e. separate legal personality, limited liability protection, etc.) except that the individual owners are taxed on their share of the LLP's income or gains. The tax rates applied are, therefore, at each partner's marginal rate of tax, which could be as high as 45%, plus there will be National Insurance implications irrespective of whether those profits are extracted by the partners or retained and reinvested in the business. The planning comes with allocating the profit to the partner or partners with the lowest marginal tax rate. 

Being a partner or owning assets used in a partnership business will generally mean that such individuals will be able to take advantage of more exemptions or deferment claims on the disposal of assets or of part or all of the partnership share (provided all the other conditions associated with the particular relief apply) than are available to companies. 

Table of differences 

The table below shows the differences between each vehicle of property ownership in relation to tax, followed by explanatory details under each heading: 

 

Individual or partnership owner 

Company owner 

Tax rates 

 

Profits taxed at owner's marginal rate (20%, 40% or 45%). 

Profits taxed at corporation tax rate – 19% (to be increased from 2023/24 for companies with profits in excess of £50,000). 

 

Property tax allowance available 

 

 

 

 

Payment date of tax 

Payments on account due 31 January in tax year and 31 July following end of tax year. If any balance is due then it is payable by 31 January after tax year.  

Nine months and one day after the accounting year end. 

 

 

 

Loan interest 

 

Relief given as basic rate reduction – fully allowable if furnished holiday let (FHL) 

Amount paid restricted to 30% of profit subject to a 'de minimis' threshold of £2m, otherwise allowable in full. 

 

 

 

Losses 

 

No sideways loss against other income or gains – can only be offset against other rental income or carried forward unless FHL. There may be restrictions if the property is not let on a commercial basis. 

Loss 'cap' = the greater of £50,000 and 25% of total profits on trading and property for the tax year relating to capital allowances. 

Offset against total profits of current year and then carried forward. Total profits include chargeable gains. 

Loss 'cap' = the greater of £5m and 50% of the next accounting period's profits. 

 

 

 

Extraction of funds 

 

Profits available after income tax or capital gains tax have been levied. 

Different methods of withdrawal. Individual must be either a director or a shareholder, or both. May be tax-deductible for company depending on method. 

Tax liability for individual will depend on method and available personal allowances. 

 

 

 

Capital gains tax 

 

 

Annual exempt amount of £12,300 ('frozen' for both individuals and estates until 5 April 2026). 

Balance taxed at 18% if basic rate taxpayer; 28% otherwise. 20% on commercial property – business asset disposal relief may be available. Incorporation is capital disposal for CGT purposes. Incorporation relief, gift relief or 'hold-over' relief and 'roll-over' relief may be available. 

No allowances – taxed at 19% corporation tax rate (to be increased from 6 April 2023 for companies whose profits exceed £50,000). 

Indexation allowance available, albeit frozen at December 2017.  

'Roll-over' relief may be available. 

 

 

 

 

Additional taxes 

 

 

 

 

 

 

 

VAT – none on residential. 

Annual tax on enveloped dwellings (ATED) – applies to high value residential properties, held within a company, that are not let on a commercial basis. 

VAT – none on residential. 

 

 

 

Inheritance tax 

 

Properties form part of an individual's estate.  

Business property relief (BPR) does not apply. 

 

Company itself not liable. 

Shares form part of the individual shareholder's estate – due on value of shareholding. 

BPR may be claimable. 

 

 

In this sample excerpt from the newly updated guide 'Investing In Property - Personal or Company Ownership', Jennifer Adams looks at what important tax considerations should be made when investing in property. Learn more about this popular tax saving report and save 30% today.

Direct investment in property can be undertaken within a variety of structures, the more common being as an individual (or partnership) or as an investment company limited by shares.

... Shared from Tax Insider: Property investment - personal or company ownership
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