Save tax and buy a rental property through a company

Thanks to the recovery in property prices in 2014, buy-to-let investments are once again hugely popular, promising attractive returns in both rental yield and capital growth. Tax considerations are inevitably not far behind.

With income tax rates at 40% or even as high as 45%, we see a growing trend towards landlords buying their properties through companies on the promise of tax savings. Corporation tax is only 20%. However, the tax position may not be what it seems.

The initial tax on profits will be lower, but the cash can only be accessed by the landlord when it's extracted as either salary or dividends. Further tax charges apply at this point. It may surprise some to learn that overall the tax position on rental income will broadly be the same irrespective of whether properties are held through a company or privately.

What are the advantages of using a company?

  • Income can be allowed to roll up in the company net of 20% tax. Salary or dividends can then be taken in a year that best suits the landlord's personal tax position.
  • Any growth in property value can be attached to a separate class of shares for inheritance tax planning.

And the disadvantages?

  • Combined corporate and income taxes are higher than under private ownership where gains on property sales are taken as salary or dividends.
  • There are additional administrative costs with companies.
  • Stamp Duty up to 15% can apply as well as a yearly charge under the Annual Tax on Enveloped Dwellings (ATED) regime.

Alternative Structures:

  • Trusts: If inheritance tax (IHT) is a concern and access to rental income is no longer needed, trusts can be a useful tool in allowing the landlord to pass property down to the next generation whilst retaining control over how the trust fund is managed. The value of the property will escape IHT if the Landlord, as settlor, survivors for 7 years. Rental income would then be taxable at the beneficiaries' tax rates, leading to tax savings.
  • Pensions: For those holding commercial property, these could be moved into pension funds where all income and growth benefits from tax-free status. Pension pots can also be passed on without any IHT applying.
  • Private:Simplicity and lower overheads are attractive features of holding properties privately, but investors' portfolios could be exposed to significant IHT charges on death.

It is important to use the structure which best suits your specific needs. Always take advice from a qualified professional. We have teamed up with Bishop Fleming Tax Consultants and recommend you speak to them so they can help you make the right decision.