When acquiring property, a number of factors should be considered. These factors include:
There are various ways to structure ownership of a residential property to mitigate your tax liability. Below, we have briefly summarised the tax implications of individual ownership versus limited company ownership for a rental property.
If you purchase a residential property personally, the rental profits you make will be taxed at your marginal rate of income tax (20%, 40% or 45%) as it arises. However, if you purchase the property via a limited company, the profits will be taxed at corporation tax rates. This has been a flat rate of 19% in recent years, but from 1 April 2023 this has increased to 25% for profits over £250,000. Companies with profits between £50,000 and £250,000 will pay tax at 25% reduced by marginal relief to provide a gradual increase in the effective rate. However, if your profits remain under £50,000, the rate remains at 19%.
In April 2017, rules were introduced to restrict the tax relief that can be claimed by higher rate tax payers who use mortgages to finance residential buy-to-let properties. Since April 2020, all finance costs incurred are disallowable in calculating the rental profit for a tax year, if you purchased the property personally. The relief is instead provided as a basic rate tax reduction in calculating your tax position.
If your rental property did not generate a profit, the mortgage interest costs are not utilised in that tax year and carried forward to be relieved in future years where you have a taxable rental profit.
These rules have proved particularly burdensome for many landlords owning property personally with buy-to-let mortgages, at times turning real-life losses into taxable profits. With interest rates increasing dramatically in recent months, you may find yourself even further out of pocket.
Personally-owned residential property would be taxed at your marginal rate for Capital Gains Tax (CGT) purposes, which were previously 18% for basic rate and 28% for higher rate taxpayers. However from 6 April 2024, the CGT rate for higher rate taxpayers has been reduced to 24% and the basic rate remains at 18%.
Individuals have a capital gains tax annual exemption of £6,000 for the 2023/24 tax year and reducing to £3,000 for the 2024/25 tax year. The annual exemption can be utilised to offset against any residential property gains which may arise.
Capital gains arising from the disposal of a residential property owned via a limited company would be taxable at the corporation tax rates noted above.
Any rental profits received from a property personally owned, are taxed as they arise in a tax year.
When extracting profits from a company, there is likely to be a double tax charge (removing any saving from the lower corporation tax rates, compared to income tax, payable on the rental profits and gains).
If profits are extracted via way of a dividend, individual shareholders may have their dividend allowances to utilise (£1,000 for the 2023/24 tax year and reducing to £500 for 2024/25). Dividend tax will then be payable on the dividend income received above the allowance (at 8.75%, 33.75% or 39.35%).
Company ownership remains advantageous for the most part where it is not necessary to extract all the profits. If profits and gains are to be retained for investment, or to be protected for future generations, then this can be an extremely tax efficient way of owning property.
There are further considerations to consider when purchasing property personally vs via a limited company, such as Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT) and Annual Tax on Enveloped Dwellings (ATED).
On SDLT, it may be worth considering several temporary extensions of SDLT relief, most notably the increase in the residential nil-rate tax threshold from £125,000 to £250,000. This measure is currently in place until 31 March 2025.
How a property investment is structured can be one of the key factors in determining the return. Our team has extensive experience of working with investors from the UK and overseas to advise on how best to invest, hold and dispose of UK residential property.
If you have any questions about the topics raised in this article or to discuss your individual circumstances, please get in touch with Polly Dowdell, Mark Stemp or your usual Crowe contact.
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