If you own rental properties in the UK, you may have considered if it would be beneficial to set up a limited company to handle your property management. This is a pertinent question. Incorporating a property management business as a Limited company in the UK can offer numerous tax benefits. In this article, you will discover what these benefits are, and how they might apply to you as a landlord.
Lower Corporation Tax Rate
Operating a property management company means you will be subject to corporation tax rather than income tax. One of the main incentives to operate under a limited company is the comparatively lower corporation tax rates.
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Corporation tax in the UK is currently fixed at 19%, while income tax rates vary between 20% and 45% depending on your personal income. This demonstrates a substantial saving opportunity for landlords who fall under the higher income tax thresholds.
Remember, though, that this saving applies to profit retained within the company. When you extract profits from the company, that income will be subject to additional tax. This leads us to our next point, the flexibility of profit extraction.
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Flexibility of Profit Extraction
Incorporating your property management business as a limited company gives you significant flexibility in how you extract your profits. This allows you to minimize your personal tax liability.
The most common method of extraction is to pay yourself a small salary, which falls below the threshold for personal income tax, and then pay dividends to take advantage of the lower tax rate.
Another advantage in this scenario is that dividends do not attract National Insurance contributions, whereas a salary would. This can lead to a substantial saving over time.
Tax Relief on Mortgage Interest
For private landlords, the ability to claim tax relief on mortgage interest has been gradually phased out. However, within a limited company structure, mortgage interest is considered a business cost and is deductable from your profits before tax.
This means that if your properties are highly leveraged with a mortgage, operating as a limited company could significantly reduce your tax bill. Although the interest rates on business mortgages are generally higher than personal rates, the tax relief benefit often outweighs this.
Potential for Future Corporation Tax Cuts
It’s also worth considering the potential for future corporation tax cuts. While we can’t predict what will happen in the future, the UK government has shown a tendency to favor businesses with lower corporation tax rates.
If you’re planning for the long term, incorporating as a limited company could put you in a good position to benefit from any further reduction in corporation tax rates.
Limited Liability Protection
While not strictly a tax benefit, the protection offered by a limited company structure can have financial implications. By incorporating, the company becomes a separate legal entity, which means your personal assets are protected if things go wrong.
If the company were to fall into debt or face legal action, your personal assets would be secure. This can provide significant peace of mind, particularly if your property management company is responsible for a large portfolio of properties.
In conclusion, incorporating as a limited company can offer numerous tax benefits for UK landlords. However, it’s not a decision to be taken lightly. It’s crucial to seek advice from a tax advisor or accountant to make sure that incorporating is the right move for you and your property business. It’s also important to take into consideration the additional administrative responsibilities that come with running a limited company, including annual accounts, company tax returns and potentially additional costs for professional services.
Incorporating a Property Management Business in the UK brings with it a host of tax benefits and potential savings. From lower corporation tax rates and flexible profit extraction to substantial tax relief on mortgage interest and the potential for future corporation tax cuts, landlords stand to gain significantly from this business model.
However, it’s not a decision to be taken lightly or without professional advice. The additional administrative responsibilities that come with running a limited company can be daunting. Be sure to seek out tax advisors or accountants who can guide you through this process, ensuring that incorporating is the right move for you and your property business.
Capital Gains Tax and Incorporation Relief
When it comes to the sale of rental properties, taxation is an important factor to consider. As an individual landlord, the sale of a property would typically be subject to Capital Gains Tax. However, when you incorporate your property management business into a limited company, you could potentially benefit from what is known as Incorporation Relief.
Incorporation Relief essentially allows a landlord to ‘roll over’ or defer the gain on a property into the shares of the new company. This means that you would not have to pay Capital Gains Tax at the point of transferring your property portfolio to the limited company. The tax would only be payable when the shares in the company are eventually sold.
This can offer significant savings, especially for landlords with large property portfolios. However, it’s crucial to note that specific criteria must be met to qualify for Incorporation Relief. This includes the requirement that the business must be a ‘going concern’, meaning it’s actively engaged in property rental.
On the downside, when a property is sold by a limited company, the proceeds are subject to Corporation Tax rather than Capital Gains Tax. While the Corporation Tax rate is typically lower, there are fewer reliefs available to offset against the gain. This is why it’s paramount to seek professional advice to understand the full implications of incorporating your property business.
Tax Advantages of Limited Companies for Inheritance Planning
When considering the long-term advantages of incorporating a property management business, inheritance tax planning should not be overlooked. As a limited company, there are potential inheritance tax benefits that landlords can take advantage of.
In a personal capacity, a landlord’s estate, which includes their rental properties, would be potentially liable for Inheritance Tax on their death. However, shares in a limited company are considered business assets and may qualify for Business Property Relief. This could potentially reduce the Inheritance Tax liability to zero.
This benefit could be significant if you’re planning to pass your property portfolio on to the next generation in your family. However, it’s worth mentioning that the rules around Inheritance Tax and Business Property Relief are complex and often subject to change. Therefore, any decisions relating to inheritance planning should be made in consultation with a tax advisor or accountant.
Conclusion
Incorporating a Property Management Business in the UK brings with it a host of tax benefits and potential savings. From lower corporation tax rates and flexible profit extraction to capital gains tax relief and inheritance tax planning, landlords stand to gain significantly from operating as a limited company.
However, the process itself is not a decision to be taken lightly or without professional advice. The administrative responsibilities and potential complexities that come with running a limited company can be daunting. Therefore, it’s crucial to seek out tax advisors or accountants who can guide you through this process, ensuring that incorporating is the right move for you and your property business.
In conclusion, landlords must weigh the tax benefits against the additional administrative responsibilities and potential risk factors. With the right advice, incorporating a property management business into a limited company can be a strategic move that offers significant benefits to landlords in the UK.
