Should I open a Limited Company?
Due to the differences in how loan and Mortgage interest is treated when held against an asset personally or in a business, more and more would be landlords are opening Limited Companies to hold or manage their properties.
As per my article ‘Landlords Losses Might Not Be Losses’, the HMRC have changed the rules on dealing with mortgage interest, and so there is possibly higher tax to pay on rental income than there was five years ago.
Due to this and other reasons, it does make a lot of sense to hold a property within a registered company, but not always, as every Landlords situation is different, as is every type of rental.
So should you hold your property through a Company?
This is a good question, and of course it does eliminate the issue of not being able to claim all of your mortgage interest as mentioned above, and it does present other issues, however the short answer is that it depends.
What is a sensible solution for one Landlord will be a big mistake for another, for example you may be renting a property that you have owned for many years, or this may be a ‘Let to Buy’ purchase purely to use investment funds released from elsewhere in the same tax year.
You could be keen to mitigate any liability you have with owning part of a property with someone else, or you could be keen to just ‘keep things simple’.
What is involved with running a Limited Company?
As with any Limited Company, the Directors (who are often also the shareholders) will have to file Limited Company accounts and a confirmation statement, as well as a Self Assessment return (as Directors/Shareholders with Dividend income), so the paperwork is increased.
Also the disclosure requirements for Limited companies is higher than that for Self Employed Landlords and Business owners, so you would probably want to hire someone to help you. This will most likely not look attractive for someone who most likely wants to keep filing simple and the bills lower. However if you have multiple properties and locations, this may be a way to help keep things in order.
Another thing to consider is losses. Personal rental losses can only be offset by other rental gains, or against future rental profits and not against employed or other types of income, whereas losses in a registered business can offset other gains elsewhere. In both cases, leftover losses can be carried forward against future profits.
The main differences are:-
Putting the property within the Registered Business
Unlike when you own the property personally or jointly from the outset, buying a property through a Limited Business or placing one within it can incur additional costs and taxes, such as Stamp Duty Land Tax.
It can also incur additional legal costs whilst going through the purchase process, and in making sure the company structure is correct with regards to the ownership of any property it holds.
Always get legal advice before entering into any business agreement.
Obtaining Loans on the property within the business
Loans and mortgages will still have to be guaranteed by the Shareholders and/or Directors, and the bank will want to see copies of correctly filed accounts during the life of the loans within the business.
The criteria for the loans will be a little different and can also incur additional restrictions on what type of loan you can get, and the interest rates it attracts. Always get legal advice before entering into any loan agreement.
It is worth getting legal advice before entering into any loans or mortgages through a Limited company, either with other people, or when alone.
Maintaining the Income and Expenditure within the Business
Your business will have to have a separate bank account and any income and expenditure earned through the business, however it has been paid for will have to be accounted for within the business accounts.
Usually a bookkeeping software is used to enable you to keep track of your income and outgoings, and you may want to employ a bookkeeper to help you with this. Your accountant will also be able to help, but this all come with a cost so it is worth thinking about in advance.
If you have a managed Property Rental, you would usually get a statement of income and costs from the management company, this and whatever additional expenditure you may have recorded, would be sufficient for completing your Self Assessment Return.
You do not need to use a separate bank account if you are Self Employed, unless it makes things more convenient for you to do so.
Getting your monies out of the business
When you own a property personally, you will pay tax on the net amount of any rental income you make, and then it is yours. When the property is owned through a Limited Company it is not that simple, as the ‘profit’ earned for the rental business belongs to the company and Corporation Tax is due on any profits before any Dividends are paid. This means that you may pay a marginally lower tax on dividend income personally, but the company pays currently 19% on any taxable income before you can pay any dividends.
Effectively the company/you pays Corporation Tax first, then Dividend tax. This used to be much lower than PAYE taxes, but not so much anymore.
You can set up a PAYE scheme, which makes sense when paying yourself from business income, however PAYE and National Insurance (both employers and employees) will be due on any monies paid above the personal allowance.
Selling the property from the business
Lastly, there is selling the property. Many advisors will tell you to avoid Capital Gains Tax, and to hold the property within a Limited Company so that you only pay Corporation Tax on the gain, but this also depends on your circumstances.
It is not all about the Gain
As I suggested earlier, you may have owned your property for many years, or bought it fairly recently and made a modest gain on the sale value, in which case you might find that a privately owned property attracts a lower or equivalent Capital Gains Tax to the possible Corporation Tax due.
Also the sale of a property held within a registered business will have any amount of monies left from the sale that the owners may want to use immediately, but unlike the privately owned properties whose funds are yours upon completion, the Director/Shareholder will still have to pay personal tax on the funds taken from the business after the sale. This is useful when there are multiple shareholder/investors in a property, as the recorded sale and division of funds is easily seen, but not so useful when the property is owned by just one or two people.
Another thing to consider is that Capital gains Tax is due 30 days after completion, whereas the income from a sale within a business is due nine months after the financial year end of the business.
Property Rental Is Never Simple
As you can see from the above information, no two properties or their ownerships are the same and as such there is no one easy answer as to how you should hold, manage or sell your rental property.
We can help you decide, weighing up the pros and cons of how to own your property and how you want to be paid any income from it, and you might find that holding the property within a company makes the most sense.
Before any of this can happen, however you will need to declare any income that has gone before and to make sure that all of your taxes are in order. Then you can move forward and decide the best options for you and your rental business for the future.
If you need any help or additional information regarding any of the above, feel free to contact us here at Aviatrix and we will be happy to review your individual situation.
Ella M Doherty FCCA
Start Date:12 Sep 2023Start Time:9:00 AM - 5:00...
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