Will it be worth the expense?
The tax advantages of setting up a limited company for property investment are compelling, but this doesn’t mean doing so is the right strategy for everyone. Although setting up a limited company can be done very quickly and cheaply, there are other associated costs that need to be considered.
Recapping the tax benefits of setting up a limited company to buy property
Before I go further, let’s quickly recap the tax advantages that will be unlocked by property investment within a limited company:
- Instead of income tax at up to 45%, you’ll pay corporation tax at 20%
- Capital gains tax is also paid at 20%, instead of a rate for higher rate taxpayers of 28%
- It can be used for estate planning and reduction of IHT liability
- From 2017, the changing tax rules magnify the tax benefits of setting up a limited company
With so many advantages, and the initial costs of setting up a limited company for property investment less than £100, you might assume that doing so is a ‘no-brainer’. But it all depends…
Companies come with responsibilities
If your property investment is done as an individual, then the only form filling you’ll need to do is your tax assessment once a year. When setting up a limited company for your property investment, you’ll need to factor in the costs of annual returns, accounts, and payroll reporting (if you employ anyone). While this can all be done yourself, the majority of business owners employ the services of an accountant to undertake the work.
Accountancy costs vary, and will depend on the services you use. As well as annual reporting requirements, these might include:
- Monthly bookkeeping
- Tax advice
- Analysis of corporate structure
- Real time reporting
- Advice on payments and dividends
Typically, a small business would pay in the region of £1,000 per year for such services.
As a director, it will be your responsibility to ensure that any changes to your company are reported to Companies House, that you file your accounts with Companies House, and your company’s tax return is filed with HMRC. You’ll also have to make corporation tax payments on time. If you make an error in any of these reporting requirements, you could face fines up to hundreds of pounds.
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Taking money out of your company
There are several ways that you can take money out of your company. You might decide to pay yourself a salary, or take dividends (the first £5,000 of dividend payments is tax free). However, before taking dividends you’ll need to pay corporation tax at 20%. Any salary taken would be taxed as ordinary income (and you may have to pay employers’ NI contributions on this).
If you do pay dividends, you will have to write a dividend voucher to show what has been paid. And If you sell any property, you may need to pay capital gains tax. If you then take this money out of the company, you could be liable to further tax paid at your marginal income tax rate.
Setting up a limited company for property investment – right for you?
As you can see, while setting up a limited company is relatively easy and very cheap, it is the associated ongoing costs that make a difference. If you don’t plan to take any of the income and/or are a higher rate taxpayer, then even if you only have a single property in your portfolio the benefits could outweigh the associated costs. And within a company structure you’re likely to make tax savings that could help you grow your property portfolio faster.
In a nutshell, don’t be scared to take a little advice and discuss your individual situation with a professional. Here at Gladfish we have a team dedicated to helping investors make their property investment work most profitably for them. There’s no situation we haven’t seen, and no problem we haven’t helped solve. Feel free to contact us today on +44 (0)207 923 6100, and one of our dedicated advisors will be happy to guide you through the benefits of setting up a limited coming to buy property as you make an informed decision if it’s the right strategy for you.
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