When purchasing a residential property for investment purposes, the tax position surrounding owning the property can be complex. Changes were introduced from April 2017 restricting the income tax relief landlords could get on finance costs, if they let a residential property as an individual, a partnership, or in a Trust. This made purchasing properties through a limited company more appealing.
When acquiring property, a number of factors should be considered. These factors include:
- the holding vehicle
- how the associated income and gains may be taxed
- the implications of the reinvestment of profits.
There are various ways to structure ownership of a residential property to mitigate your tax liability. Below, we have briefly summarised the tax implications of individual ownership versus limited company ownership for a rental property.
Rental profits
If you purchase a residential property personally, the rental profits you make will be taxed at your marginal rate of income tax (20%, 40% or 45%) as it arises. However, if you purchase the property via a limited company, the profits will be taxed at corporation tax rates (currently 19%). The Corporation Tax rates were set to rise from 1 April 2023 but the new Prime Minister, Liz Truss has promised to cancel the corporate tax hike.
Mortgage interest relief
In April 2017, rules were introduced to restrict the tax relief that can be claimed by higher rate tax payers who use mortgages to finance residential buy-to-let properties. Since April 2020, all finance costs incurred are disallowable in calculating the rental profit for a tax year, if you purchased the property personally. The relief is instead provided as a basic rate tax reduction in calculating your tax position.
If your rental property did not generate a profit, the mortgage interest costs are not utilised in that tax year and carried forward and relieved in future years where you have a taxable rental profit.
These rules do not apply for properties owned via a limited company. Mortgage interest is fully deductible in calculating the rental profit for the year.
Disposal of the property
Personally-owned residential property would be taxed at your marginal rate for Capital Gains Tax (CGT) purposes (18% or 28%).
Capital gains arising from the disposal of a residential property owned via a limited company would be taxable at the lower corporation tax rates noted above.
Profit extraction
Any rental profits received from a property personally owned, is taxed as they arise in a tax year.
When extracting profits from a company, there is likely to be a double tax charge (removing the saving from the lower corporation tax rates payable on the rental profits and gains).
If profits are extracted via way of a dividend, individual shareholders may have their dividend allowances to utilise (£2,000 for the 2022/23 tax year). Dividend tax will then be payable on the dividend income received above the allowance (at 8.75%, 33.75% or 39.35%).
Company ownership can be advantageous for the most part where it is not necessary to extract all the profits. If profits and gains are to be retained for investment, or to be protected for future generations, then this can be an extremely tax efficient way of owning property.
Other considerations
There are further considerations to consider when purchasing property personally vs via a limited company, such as Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT) and Annual Tax on Enveloped Dwellings (ATED).
How we can help
How a property investment is structured can be one of the key factors in determining the return. Our team has extensive experience of working with investors from the UK and overseas to advise on how best to invest, hold and dispose of UK residential property.
If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with Polly Dowdell, Mark Stemp or your usual Crowe contact.
