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What kind of property investor are you? Part 2: Property Investment Company Director

First Published: May 2014 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

Some landlords own their properties within a limited company – so, they own the company, and the company owns their properties. But why would a person operate in this way, and what are the benefits of doing so?

Why would a landlord use a property investment company?

For landlords expecting property profits – or income from other another source – to take them into the Higher Rate (40%) income tax bracket (for tax year 2014: >£41,450 income), using a property investment company enables profits to be taxed at the lower corporation rate of 20% – this is the primary reason to use a property investment company.

Landlords who use a property investment company tend to have either very high rental yields, or very low gearing, meaning significant rental profits. Typically, rental profits would need to exceed £100,000 per annum for a property investment company to become worthwhile.

Another tax reason to use a property investment company is because companies receive an ‘indexation allowance’, which strips out the inflation element of any capital gain before calculating the tax due on a property sale. For properties that are held for the longer term (typically several decades), this can mean that a significant part of any capital gain is not taxable.

Other benefits of using a property investment company …

Use of losses

Companies can offset in-year rental losses against other forms of income, and against capital gains – meaning losses can actually be used to generate tax rebates. This is in contrast to personal investors who make rental losses – these losses can only be rolled forward and ONLY offset against future rental profits (NOT capital gains).

Legacy planning

A final key benefit of operating a property investment company is in respect of legacy, or estate, planning. A company does not ‘die’ even if its directors and shareholders do.

This means that a property portfolio held within a company can be passed on from one generation to another without interruption to its day to day operation – in contrast often to a personally-held portfolio which often needs to be sold off or remortgaged upon the death of an owner.

And, mortgages on corporate properties do not necessarily need to be repaid upon the death of a director / shareholder.

Limited Liability protection

This is not generally a major consideration for landlords, since residential property investment is a fairly low-risk venture. Also, most lenders will require that the owner-directors provide personal guarantees as part of the lending criteria – so walking away from debts isn’t an option.

However, even having at least some extra protection may be useful, for example as the threat of tenant litigation increases, and so a company can offer some ‘ring-fencing’ of personal assets. This may be desirable, particularly for investors with families and significant personal assets.

Improved perception

Generally, there is a widespread perception that companies have a ‘higher status’ than private landlords – rightly or wrongly!

But I’ve heard it’s more difficult to get finance as a company – is that true?

It’s certainly true that there are far fewer lenders available to companies than there are to individuals. This is the main reason that most landlords do not use a company to hold their properties – corporate lenders typically require larger deposits, and charge higher interest rates and fees, for corporate borrowings.

Having said that, commercial finance, which is the most common type of finance for property investment companies, is a far more flexible option than BTL finance for many investors.

But how do I take my money out of my company – I’ve heard there is more tax to pay?

A major downside of using a property investment company is the potential additional tax when extracting company profits – BUT, bear in mind this applies to ALL companies.

The ‘traditional’ strategy to ensure a tax-efficient withdrawal of the company’s profits by the owners is to take a small salary, combined with additional dividends up to the Higher Rate income tax threshold.

Up to the Higher Rate income tax threshold of £41,450 (2014), there is no additional personal tax to pay by the shareholder (therefore the only tax paid is the 20%, paid by the company).

However, for profits to be extracted above this level by way of additional dividends, in any one tax year, means an extra tax charge of 25% of the amount taken. This means that in order to avoid paying Higher Rate income tax, each shareholder is restricted to a total income of £41,450 (2014 tax year).

Of course, for a typical husband-and-wife scenario, this equates to a gross income of £82,900 (2014 tax year), with NO personal income tax to pay – many landlords would regard a household post-tax income of almost £7,000 per month as an adequate income! Funds above this level are retained within the company and re-invested into new properties, refurbs, extensions to add new rooms etc …

Downsides of using a property investment company …

Companies do not get the benefit of a Capital Gains Tax (CGT) Annual Exemption, as individuals do, and many CGT reliefs (e.g. private residence relief) are not available to companies.

Therefore, generally, the longer a property is held for, and the more profitable it is, the more a property investment company makes tax sense, as the indexation allowance factor becomes more valuable with larger capital gains. Shorter term holding of investment property is often better dealt with as an individual.

Practicalities of having a property investment company…

The decision – and set-up

Setting up your property company should ideally be dealt with by a professional accountant. This is to ensure that:

  • you really do need a property company (many investors like the idea of ‘running a company’, but in reality don’t actually need one), and
  • the company is set-up correctly in the first place – it’s surprising how many ‘DIY’ errors are made, some of which can’t be corrected. Key decisions include – where should the Registered Office be? Who should the Directors and Shareholders be, and why? What type of shares are needed, and why, and how many?

Day-to-day running of the company

Your accountant should ensure that, as a new Company Director, you have the proper understanding, and tools, needed to run your new company.

This means everything from managing the company bank account, to insurance, to maintaining the company’s accounting records to enable the year-end accounts work and tax return to be completed. Company Directors do have some serious legal responsibilities that should be clearly understood before operating a company.

Remember that, as a Company Director, you are legally distinct from the company – many Directors forget this, and inadvertently land themselves with tax bills that they could have avoided – or worse.

Year-end accounts and Corporation Tax

The company must file statutory accounts in the format prescribed by law, and a Corporation Tax Return must be filed with HMRC, and tax paid, by the required dates. PAYE registration may also be required if staff are employed. Treat your business seriously and ensure you appoint a properly qualified and experienced property accountant to help you to run your new company.

Summary – is a property investment company right for you?

Clearly, deciding as a landlord whether to use a property investment company depends on a variety of factors, such as: expected business profits, other personal income, your other options in terms of property ownership, how long you intend to hold your properties for, and whether you need mortgage or other finance, and at what loan to value.

For many investors, using a property investment company is a very tax-efficient way of operating. The potential to pay just 20% Corporation Tax on profits and capital gains, and then re-invest these post-tax funds, is a significant benefit that many wealthy investors use to maximise their overall returns – not to mention the potential to draw income now, or in the future, and pass on the company’s shares to family in a piecemeal fashion.

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