Many landlords may well have pondered this question at some time… Rutton explains the reasons why you shouldn’t put lettings properties into a limited company in this article.
I have been in tax practice all my adult life. And it’s remarkable how often the same questions come up time and again. But the trouble with hot potatoes is just that: they are just too darn hot to handle safely! But they cause a lot of concern in people’s minds – genuine concern.
So here goes – why is personal ownership almost always better than limited company ownership of residential let properties?
It’s true the higher rate tax relief is being withdrawn from rental income – so having the income in a company has an advantage. But is it worth it? With borrowing rates so low, and with the tax relief being only progressively reduced over five years, the company advantage is pretty small in most cases. And of course you are still only getting 20% corporation tax relief. The big problem with company income is, having paid your 20% corporation tax, you still have to get the money out of the company. If you are basic rate, that’s a further 7.5%. Most landlords will be higher rate, so that’s a further 32.5% on the dividends. So no, not worth it.
When it comes to selling:
The same double tax disadvantage all apply to the entire proceeds of sale! So no, of course I don’t recommend it.
But that’s not what clients want to hear, and not seemingly what the taxation and financial press seem to recommend all the time. So what’s going on?
Two articles in Taxation magazine recently prove the point:
The first, by Peter Rayney (a distinguished tax author and practitioner) is dated July 2016. His article relates to a couple who are so well off that they don’t really need the income from the property rentals. In that case, of course, sheltering income in a company at 20% becomes attractive. But this rarely applies to any of my clients. And of course, Peter’s article does not raise the double tax whammy on sale either, presumably because the clients are rich enough to reinvest the sale proceeds into other properties, using the company, and not withdrawing the funds. But surely even there, they will need the money one day – or someone will? Then it’s whammy time – and no personal CGT reliefs (e.g. Annual exemptions).
The second article, by Neil Warren, in August 2016, explores the VAT advantages of putting your residential property development through a company . The problem is – it’s a commercial development project that is involved, not residential lets! Even there, the advantage is he’s caught the clients before they have bought the property. It’s a LOT easier to get the company to purchase rather than transfer later. So again, this commercial development scenario is not for most of my clients. Even if it were, back we come to the double whammy on sale – unless you re-invest.