If you’re a landlord looking to expand your property investment portfolio, it’s understandable that you’ll want to keep your operations as tax efficient as possible. After all, you’re running a business.
It was recently cited by CBRE that the UK private rental sector has lost approximately 400,000 rental homes in the last 7 years. This is in large part due to changes in tax policy compounded by higher mortgage costs and high inflation which are reducing the attractive nature of a buy-to-let investment.
Despite the decline, we are seeing an increase in the number of landlords incorporating their portfolios as limited companies to take advantage of associated tax benefits. In this week’s Tax Tuesday we look at two routes to property investment: as a sole trader or through a limited company.
One of the risks associated with buy-to-let as a sole trader is that you and your business will be regarded as a single entity, which means that you are personally liable for any losses made. If you buy-to-let as a limited company, then the property is classed as separate from your personal affairs. This limited liability means that you are protected from being liable for the company’s financial losses and debts should anything go drastically wrong.
Income tax vs. corporation tax
Included in the concept of being a single entity if investing as a sole trader is that you will be required to pay income tax via self-assessment on any income you receive from letting.
If you invest through a limited company, then your financial situation is viewed as separate from that of the company. This means that any profits and gains will instead be subject to corporation tax at 19% (rather than income tax at up to 45% or Capital Gains Tax at 28%). In the limited company scenario, you would be able to take a small salary, with a lesser tax liability and take dividends to supplement the remainder of your income.
It’s important to note that limited companies do not pay capital gains tax on the profits from selling a property but, instead, the gain contributes towards the profits that are subject to corporation tax. Although this means that limited companies are not entitled to the capital gains tax-free allowance, it’s likely that it will be a more tax-efficient method in the long-run.
Speaking of dividends…
Dividends are not only free from National Insurance obligations but they are also taxed at lower rates than PAYE income. Shareholders in the company are entitled to £1,000 tax-free dividend allowance, and any dividends received above this are taxed based on the same thresholds as income tax:
- 8.75% (basic rate taxpayers)
- 33.75% (higher rate taxpayers)
- 39.35% (additional rate taxpayers).
Despite the dividend tax rates, investment through a limited company is often more tax efficient than the income tax and national insurance obligations of investment as a sole trader.
Property investment taxes
You may have already read about property investment taxes in our previous Tax Tuesday instalment. However, buy-to-let residential properties are also subject to a 3% surcharge on Stamp Duty Land Tax (SDLT) on properties over £40,000. This surcharge is due whether it’s the first buy-to-let property purchased or not, and is applied whether investing as a sole trader or through a limited company. If you are deciding whether to move your portfolio over to a limited company, then the SDLT and the surcharge should be considered. This is because to transfer your buy-to-let investments to the limited company, you would need to purchase the properties from the sole trader, incurring a SDLT charge (and inevitably the surcharge) as well as capital gains tax on the sale of the property to the company.
How can we help?
“This is a really complex area” says Rebecca Holloway, Head of the Property team at Harold Sharp. “There are lots of considerations when making a property investment. For example, how quickly do you need access to the cash? Can you benefit from incorporation relief? What are the structural restrictions around SDLT? Without expert advice, there’s a risk that making the wrong decision could be costly. Investments should be considered on a case-by-case basis to ensure the structure meets the needs of the individual investor.”
If you are considering an investment in buy-to-let and would like further advice regarding your options, please do not hesitate to get in touch with our Tax Team by emailing firstname.lastname@example.org or giving us a call on 0161 905 1616.