Letting property as an individual or a company?

Perhaps one of the most common questions we get asked by clients planning to buy property to let is whether it is best to use a limited company to hold the property. The answer is always the same; ‘it depends’. Commendably brief but less than useful in itself. But it is a good question nevertheless. The key is what you aim to get out of letting the property as well as thinking about your wider financial circumstances. Here are some of the issues:

• are you a basic or higher rate taxpayer?
• do you anticipate selling the property in the next few years if there is a gain to be made?
• are you going to buy a number of properties?
• are you just taking an opportunity or is this a plan for your future, possibly for retirement?

There are probably other issues to consider in answer to whether it is best to be letting property as an individual or a company? But the answer will depend on your personal circumstances and your personal and financial aims. This is largely because of the interplay of income tax (IT) and capital gains tax (CGT).

If you are a basic rate taxpayer then it probably makes sense to hold the property personally. You will be paying income tax at 20%, with no National Insurance (NI) as it is investment income. When you sell the property you will probably be paying 18% CGT after your annual CGT allowance which is over £11,000. If you lived in the property before letting it you will also be entitled to apportion the gain to the period is was let as well as the final 18 months of ownership being exempt. You will also potentially be allowed Lettings Relief of up to £40,000 on the profit.

In a company there is again no NI but otherwise none of the above apply; the profit and gain are taxed at 20% but you still may have to pay some further tax on taking the money out of the company.

On the other hand, if you are a higher rate taxpayer the pendulum starts to swing in favour of using a company as the company profit is taxed at the Corporation Tax (CT) rate of 20% rather than 40 or 45%. That’s good as long as you don’t need to take the profit out of the company when you would lose any benefit gained. It’s the same for CGT as the tax rate in the company is 20% instead of 28% personally. In other words, if you can leave the profits in the company for some years until you cease being a higher rate taxpayer, or reinvest any gain into other properties, then using a company makes perfect sense.

Your accounting costs will be noticeably higher using a company so we would normally do a cost/benefit analysis before starting a company for you. Even from the brief summary above you will see that it’s impossible to have a one size fits all solution. And both your circumstances and the tax rules change over time so keeping the situation under review if crucial. An ongoing relationship with an advisor will help you make a better decision on the way forward.