Pros and Cons of Limited Company Small Buy to Let
Published / Last Updated on 06/05/2023
With huge changes to stamp duty rates, cuts in capital gains tax allowances, higher capital gains tax rates for property disposals, and reductions in your ability to offset interest mortgage/finance costs against income taxes, there has been and still is much interest in setting up a limited company to buy investment property.
So much so that the government has already introduced higher stamp duty rates for 2nd properties and foreign ownership, as well as an Annual Tax on Envelope Dwellings (ATED) for properties worth £0.5m or more inside a corporate structure such as a trust or a limited company. In addition, corporation tax rates have increased, dividend tax rates have increased, and the tax-free dividend allowance has been reduced.
Confused? Many property investors are confused by what is that best route to own investment property i.e., personal or company and what value properties you should go for. Therefore, we decided to issue an update on the pros and cons of buying an investment property personally or via a limited company.
Example 1: Smaller £250,000 residential investment property purchase by UK resident. Rented for £1,000 pm. No mortgage required. £2,000 pa running expenses. Assumes all personal allowances and dividend allowances are already used elsewhere. Assumes all profits are taken as personal income if personally owned or dividend income if company owned.
|
|
Personally Owned |
Limited Company Owned |
|
Purchase Price |
£250,000 |
£250,000 |
|
Stamp Duty |
3% = £7,500 |
3% X £250,000 = £7,500 |
|
Total Cost |
£257,500 |
£257,500 |
|
Rent Received |
£12,000 less £2,000 expenses = £10,000 profit |
£12,000 less £2,000 expenses = £10,000 profit |
|
Income Tax if All Basic Rate 20% |
£2,000 tax = £8,000 net income |
N/A |
|
Income Tax if All Higher Rate 40% |
£4,000 tax = £6,000 net income |
N/A |
|
Income Tax if All Additional Rate 45% |
£4,500 tax = £5,500 net income |
N/A |
|
Annual Tax Envelope Dwelling (ATED) |
N/A |
£0.00 |
|
Corporation Tax |
N/A |
19% X £10,000 = £1,900. Net profit available for distribution £8,100. |
|
Dividend Tax if All Basic Rate 8.75% |
N/A |
£708.75 tax = £7,391.25 net income |
|
Dividend Tax if Higher Rate 33.75% |
N/A |
£2,733.75 tax = £5,366.25 net income |
|
Dividend Tax if All Additional Rate 39.35% |
N/A |
£3,187.35 tax = £4,912.65 net income |
|
Net Income if All Basic Rate Taxpayer |
£8,000 |
£7,391.25 |
|
Net Income if All Higher Rate Taxpayer |
£6,000 |
£5,366.25 |
|
Net Income if All Additional Rate Taxpayer |
£5,500 |
£4,912.65 |
|
Conclusion on Income |
Personal Ownership Wins |
|
Capital Gains Tax if Sell Property for £400,000 5 years later. Assuming no money spent on improvements. Full Capital Gains Tax Allowance Available. Entrepreneur’s Relief not available for investment company shares as no business has been sold)
|
|
Personally Owned |
Limited Company Owned |
|
Purchase Price |
£250,000 |
£250,000 |
|
Sale Price |
£400,000 |
£400,000 |
|
Gain/Profit |
£150,000 |
£150,000 |
|
Capital Gains Tax (CGT) Free Allowance |
£6,000 |
N/A |
|
Chargeable/Taxable Gain |
£144,000 (charged to capital gains tax) |
£150,000 (charged to corporation tax) |
|
CGT If Full Basic Rate Tax Band Available |
£6,786 (£37,700 X 18%) + £29,764 (£106,300 X 28%) = £36,550 |
N/A |
|
CGT If All Taxed at Higher Rate |
£144,000 X 28% = £40,320 |
N/A |
|
Corporation Tax on Gain/Disposal |
N/A |
25% X £150,000 = £37,500. Net profit for distribution £112,500 or wind up. |
|
Wind up Company CGT Free Allowance |
|
£6,000 on wind up |
|
Chargeable/Taxable Gain |
|
£106,500 (no 10% entrepreneur’s rate but CGT rates on share disposal/wind-up are lower than direct property CGT rates 10% and 20% rather than 18% and 28%) |
|
CGT If Full Basic Rate Tax Band Available |
N/A |
£3,770 (£37,700 X 10%) + £13,760 (£68,800 X 20%) = £17,530 |
|
CGT If All Taxed at Higher Rate |
N/A |
£106,500 X 20% = £21,300 |
|
Net Gain if Some Basic Rate Taxpayer |
£150,000 less CGT £36,550 = £113,450 |
£150,000 less Corp Tax £37,500 and CGT £17,530 = £94,970 |
|
Net Gain if All Higher Rate Taxpayer |
£150,000 less CGT £40,320 = £109,680 |
£150,000 less Corp Tax £37,500 and CGT £21,300 = £91,200 |
|
Net Gain if All Additional Rate Taxpayer |
£150,000 less CGT £40,320 = £109,680 |
£150,000 less Corp Tax £37,500 and CGT £21,300 = £91,200 |
|
Conclusion on Sale/Property Gains |
Personal Ownership Wins |
|
All calculations are approximate and assume allowances as at 06/05/2023 despite this, allowances will change in the coming years to likely more taxes but we suggest the idea of owning a smaller property inside a special purpose vehicle such as a limited company is only beneficial for stamp duty avoidance on ‘sale’ of the company rather than the property but the additional administration and ongoing taxes outweigh the benefit.
Example 2: Larger Buy to Let - See Ltd Co BTL Large
