In the past, commercial properties tended to be held in companies whereas residential properties were more commonly held by individuals and partnerships. Have recent tax changes tipped the balance such that residential properties should be held in companies as well? The answer is, as with most questions of this nature, dependant on the exact situation. Here is a checklist of some of the most common factors to consider that I have come across in recent practice.
"holding residential properties through a company has taken on a whole new attraction to many…"
Changes to consider As of 1 April 2016, there is a 3% SDLT surcharge on the purchase of additional properties by an landlord. This obviously makes amassing a property empire, or even a modest property business, significantly more expensive than in the past. The restrictions on loan interest relief for individuals are now in full force, adding to the burdens of individuals or partnerships borrowing to invest in residential property. Avoiding the downsides has meant that holding residential properties through a company has taken on a whole new attraction to many landlords, investors and advisers.
Advantages There are many reasons to believe that incorporation may be a good idea. Not least of which is that you circumvent the new restrictions on loan interest relief, albeit at the risk of being subject to the corporate interest restriction code instead. Interestingly the corporate code includes an exemption, the confusingly named public infrastructure election, for companies undertaking property businesses that fall within its criteria. Companies are taxed at the corporation tax rate of 19% rather than the income tax rate, being 45% at its highest level. Income can be accumulated in the company for as long as required avoiding higher tax rates, potentially until retirement or beyond. And as an added cherry on top, dividend income has a £2,000 tax-free allowance annually, which may be a welcome bonus. Admittedly this was reduced from a £5,000 allowance in 2018, but any tax-free allowance is better than nothing!
A further often overlooked benefit is that a company, divided up into many shares, can be more versatile in terms of inheritance tax planning than a finite number of physical properties. The shares do not count when determining whether the 3% supplemental SDLT or LTT charge applies when the shareholder buys a residential property. Incorporation, where the right criteria are met, provides a tax-free uplift in the base cost of the properties to current market value, with the potential to significantly reduce future CGT if the company disposes of the properties, but at the expense of a tax free uplift in the base cost of the properties on death.
On the other hand There are disadvantages. While the 19% corporation tax may seem attractive, there is of course the double layer of taxation to contend with when withdrawing funds from the company. Capital growth in the value of the property increases the value of the shares, which needs to be considered if liquidation is the intended exit strategy. The maths is complicated, and the numbers need to be meticulously crunched. Don’t overlook employment tax issues; beware benefit-in-kind charges if a director or shareholder makes personal use of any properties. To add insult to injury, companies do not receive an annual exemption for capital gains.
The comparison is easier to make for those starting a property business. For others, the pros and cons must also factor in the potential consequences of moving from personal to corporate ownership and the restrictions that may apply in order to avoid paying CGT and SDLT/LTT to do so.
Forget the tax tail; what about the dog? Incorporation also comes with additional book-keeping. The burden of compliance in the form of tax returns and detailed accounts is higher. Finance providers are different with different requirements. There is a cost in privacy, as a result of public filing with Companies House. While you may avoid some of these issues through minimal compliance or with an unlimited company, these strategies have their own inherent risks and still leave your affairs more public than otherwise. Finally, as a minor point, companies do not receive the benefit of consumer-protection legislation, a potential safety net enjoyed by individual property owners.
And the answer is… If these drawbacks sound a note of caution, you may now be wondering: what are the alternatives? Whilst, in the current tax environment these are limited, the key may be to analyse exactly what you aim to achieve. For example, is it the property that the company should hold or the rental stream? Holding property personally has become expensive and for some that may just be the cost of doing business. A property investment company is not a panacea for all property investors; it might be an answer for long term investment and re-investment for business families.
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