NEWSLETTERS

Incorporation

Published 27th March 2017

Holding your property investments through a company still seems attractive for many – but there are serious pitfalls and it may not be appropriate for very many people at all.

The headline advantages are

  • The restriction on tax relief on mortgage interest does not apply
  • The profits are only taxed at 20%
  • And of course there are some other lesser advantages perceived by some owners.

However there are still some major disadvantages to weigh against any perceived benefits

  • If you transfer an existing portfolio into a company you are making a disposal and may have a lot of Capital Gains Tax to pay.
  • If you transfer an existing portfolio into a company you may have a lot of Stamp duty Land Tax to pay.
  • While the company will pay tax on the profit at 20% you will have to pay more tax when you take a dividend in excess of £5,000. (7.5%/ 32.5% / 38.1%). If you take a salary the company tax will be reduced but you will have to pay income tax and the company will have a liability for National Insurance – and you may too.
  • When the company sells a property it will pay tax at 20% on the gain, but if you want to take the money out of the company you have the same problem as in the paragraph above.
  • The annual running costs of the company can be quite substantial because of the obligation to prepare and file accounts and corporation Tax returns all in addition to your own tax returns.
  • The company structure is relatively inflexible. It can be very expensive to reverse incorporation.

Be very careful before you incorporate. There are so many variables not least of which is the uncertainty as to what changes there will be in legislation over the next five, ten or twenty years. There is no right answer. Only those that may be not quite so bad as others.

The newsletters on this website are believed correct at the time of publication. They may not include subsequent changes in the law. If the subject matter is of interest you should contact us to see if there is a relevant update.

Taxation is a complicated subject and is subject to change. This article is provided for general guidance only. You should only rely on advice prepared specifically for you. Neither the writer nor Landlords Tax Services Ltd can be held liable for any loss arising from any act or omission by you as a result of your understanding of this article.

Landlords Tax Services Ltd, specialises in the taxation of residential property income and gains and around half its clients are resident outside the UK. If you would like specialist help contact Maurice Patry F.C.A. at maurice@landlordstax.co.uk or for more information visit our website at Landlords Tax Services Ltd