Investing in property – is it best to purchase as an individual or company

This information is provided by Tayabali Tomlin – a brilliant local chartered accountant and business adviser based here in Moreton-in-Marsh. We have been clients of Tayabali Tomlin for many years and have no hesitation in recommending them.

Investment in property has been, and continues to be, a popular form of investment for many people. It is seen as a route by which:

Relatively secure capital gains can be made on eventual sale

Income returns can be generated throughout the period of ownership

Mortgage finance is covered in repayment terms by the security of the eventual sale of the property and in interest terms by the rental income

Of course, the net returns in capital and income will depend on a host of factors but, on the basis that the investment appears to make commercial sense, what tax factors should you take into account.

This information should be considered only in relation to a UK resident property owner.

Who should purchase the property

An initial decision needs to be made whether to purchase the property:

As an individual

As a joint owner or via a partnership (often with a spouse)

Via a company

There are significant differences in the tax effects of ownership by individuals or a company.  Deciding on the best medium will depend on a number of factors. These include:

If you already own a company

Expected drawings from the company

Whether you are expecting to invest in more property in the future

Whether you are expecting to sell individual properties piecemeal or as a portfolio in the future

If you are mainly financing the initial purchases of the property from your own capital

Initial purchase of the property

SDLT is payable by the purchaser of the property in England. The rates are dependent on the value of the property and whether it is residential or non-residential.

Purchase by company

Where expensive residential property valued at more than £500,000 is purchased by a ‘non natural person’, broadly a company, there is a potential charge – the Annual Tax on Enveloped Dwellings (ATED). The ATED is payable by those purchasing and holding residential property through corporate envelopes, such as companies. In addition, a higher rate of SDLT of 15% applies to the purchase.

There are exemptions from the higher rate of SDLT and the ATED charge; in particular, property companies letting out residential properties to third parties.

Ongoing rental

Rental income

For personally owned property the net rental income will be taxed at your marginal rate of tax.

Specific rules apply to split rental income for jointly owned properties and Tayabali Tomlin can assist you with understanding these further.

In contrast, the net rental income for a company will be taxed at the corporation tax rate which may be lower than the income tax rates for an individual depending on the amount of rental and other sources of income. However, there is frequently a further tax charge should you wish to extract any of the proceeds from the company.

The overall tax cost on income will therefore be partially dependent on how much of the income you wish to extract and how that income will be extracted e.g. salary, dividend, pension contribution etc. Where profits are retained by the company, the income may suffer less tax than if income tax applied. That means there are more funds available to buy more properties in the future.

Finance costs

Tax relief for finance costs on residential property held by an individual is limited to 20% as a basic rate income tax reducer.

This restriction does not apply to non-residential landlords nor to companies investing in residential or non-residential property.

Disposal

Capital gains on the disposal of an asset are generally calculated by deducting the cost of the asset from the proceeds on disposal and reducing this by the annual exemption. Gains are treated as an individual’s top slice of income and are generally taxed at 18% and 24% or a combination of the two.

Capital gains for companies will be subject to the rate of corporation tax applicable to the company i.e. 19% or 25%.

Disposal of a property investment company

CGT will be due on the gain on the shares.

The disposal of shares may be more attractive to the purchaser of the properties rather than buying the properties directly, as they will only have 0.5% stamp duty to pay rather than the potentially higher sums of Stamp Duty Land Tax (SDLT) on the property purchases.

How Tayabali Tomlin can help

This information concentrates on some of the tax factors to bear in mind when considering starting to invest in property. Tayabali Tomlin can help you to plan an appropriate course of action for your property investment in the North Cotswolds and surrounding counties including Gloucestershire, Oxfordshire, Warwickshire and Worcestershire. Tayalbali Tomlin can be reached on 01608 650450 or hello@tayabalitomlin.co.uk