Purchasing rental or investment properties is a popular way to utilise any surplus cash, potentially increase your income and provide for you and your family's future. There are a few ways you can do this, the common routes being either to purchase the properties personally or through a limited company.
Owning property personally
Owning a property personally will mean the deeds and the mortgage (if applicable) will be in your name and you will personally need to pay income tax on any profits. Current Income Tax rates for 2022/23 vary between 20%-45%, depending on your earnings.
Owning property in a limited company
If you purchase a property via a limited company, the deeds and any mortgage will be in the name of the company, and the company will be liable to pay Corporation Tax on any profit. Corporation Tax rates for 2022/23 are currently 19%, however this is set to increase to 25% for investment companies from April 2023.
A limited company can be used as a long term investment vehicle by retaining profits within the company and using these to reinvest in additional property to grow your portfolio.
Alternatively, as a shareholder of the company, if the company is profitable and has the reserves to do so, you could declare a dividend. Dividend income is currently taxed at a lower rate than other income and, on top of this, you may be able to take advantage of your annual dividend allowance (which for 2022/23 is currently £2,000) if this has not already been utilised elsewhere.
Transferring personally-owned properties into an investment company
You may already hold rental or investment properties personally and are now looking to transfer these into a limited company. This could be because you wish to expand your portfolio or simply benefit from the advantages associated with this. Some great examples include:
Profits from selling property within the company are currently taxed at 19%, rather than 28% if you were to own it individually (for higher rate taxpayers)
There is no restriction to mortgage interest relief like there is if you own a property personally.
If you incorporate a separate company, you will be able to transfer any properties held personally by either gifting or selling them to the new investment company.
The best option will depend on your specific situation, however, in both cases, the transfer will likely incur initial tax charges like Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Although you may incur initial tax charges, there are longer-term benefits available that may outweigh these and certain allowances that you could claim; for instance, you may be able to mitigate some of the CGT that is materialised by utilising your CGT annual exemption if you have not made any other capital disposals during the tax year.
This is just one of many examples, and there are several pros and cons to consider with this transaction, as well as owning property in a separate limited company altogether. If you would like to know more information or get specific advice based on your situation, then please get in touch using the details at the bottom of this page.
If you are thinking about setting up a new investment company to hold your property portfolio, this could be a good opportunity for you to consider family tax planning. Any property held by you, or by a company owned solely by you, will be within your estate for Inheritance Tax purposes.
Getting your family involved as shareholders in the business could offer multiple opportunities to provide for your family member’s futures. There are several different options to consider with family planning, and so we always recommend speaking to someone first to ensure you choose a path that is right for you. If you would like to chat with us about your options, please let us know and we will be happy to arrange a call.
If you have any questions on the above or would like to chat to us about your options, please drop an email to email@example.com, and myself or someone in our tax team will be more than happy to book in a time to chat.