Incorporating a property rental business
Over the last few years there have been a litany of changes to the UK tax rules around the taxation of residential property ownership for business purposes. Many of the changes have been such that those who previously operated “buy-to-let” businesses in their personal capacity (as a sole trader or through a partnership) will have considered whether it is more tax effective to incorporate their personally held businesses into a company structure.
This note looks at the headline tax issues relevant to incorporating a personally held property rental business.
Why incorporate?
The restriction on the deductibility of interest for individual buy-to-let landlords and the imposition of higher rates of capital gains tax on disposal of residential property (28%) which only apply to direct individual ownership (i.e. they do not apply to companies) make the option of owning residential investment properties through a company more attractive. For further discussion of this see our article
The advantages of operating through a company include:
- Relief is available for all interest paid.
- Corporation tax is at 17% on income and gains.
- Income can be accumulated in the company for distribution after retirement to avoid higher rates of tax.
- If ownership is to be passed or shared between family members, share capital offers greater flexibility than real property.
- The first £2,000 of dividend income for each recipient is taxable at 0%.
However, before you consider the tax rules in any detail you should consider first whether you need to be able to extract net profit from your property rental business on a frequent basis. You cannot forget that even though the rate of corporation tax is considerably lower, if you need to extract net profit from the business, where that business is operated through a company, you will encounter a second tax point on extracting those business profits.
The expected way to remove profit from a company is to declare a dividend. The current rate of tax on a dividend payment received by an individual is 32.5% for higher rate taxpayers. This means that you can either pay a higher rate income tax bill of 40% to get the profits from the business direct into your hands, or you can pay corporation tax at 17% followed by dividend tax at 32.5% (a total tax cost of 49.5%) to get into the same position.
To continue to read the full article, click through to https://www.jonathanlea.net/2020/incorporating-a-property-rental-business/ for the complete article.
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