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Thought about creating your own Property Investment Company?

20 July 2022
Darren Hughes
Property Owners, Reducing Tax

Are you a high net worth individual?

Are you paying higher rate tax?

Are you being penalised for saving into your workplace pension?

Are you approaching or exceeded your pension lifetime allowance?

Have you thought about diversifying your savings/retirement with a property portfolio?

If you have answered yes to any of the above questions then you might want to consider setting up a property investment company.

As part of an overall tax and investment strategy, special purpose vehicles (SPVs) for owning residential or commercial investment property can be very efficient and are well worth considering in the right circumstances.

By owning investment properties within a separate legal entity, like a limited company, rental profits generated will be sheltered in this separate entity and not taxed on you personally. Rental profits generated within the company will be taxed at 19% (please note that from 1 April 2023 this will increase to up to 25% where profits exceed £50,000). Compare this with income tax rates of 40/45% plus the ability to claim full tax relief on your lending costs which is no longer available for residential lets, and the company route seems immediately more favourable.

You need to take care however if you already hold property in your personal name that you now wish to transfer into company ownership. This will lead to a stamp duty land tax liability and in most cases capital gains tax will be payable too. If you have several properties that you run as a proper business which you spend at least 20 hours a week working on there are potential exemptions from CGT and SDLT. However we would always caution you to take professional advice in those circumstances.

For new purchases of investment property an SPV is always worth at least considering, provided your lender is happy with the structure and the interest rates are competitive. We would normally only recommend corporate ownership where there are at least three rental properties, or you aspire to own such a number, to make it viable in running a limited company due to the increase costs concerned.

As the portfolio grows there will be other tax saving opportunities too. For example, the business will be able to pay for expenses on behalf of the directors, for example, life insurances, annual events (Christmas parties), employer pension contributions, tax efficient company cars, to name but a few.

Companies are also a useful vehicle for transferring all or some of your company shares to your loved ones, either directly or in some cases by using a family discretionary trust.

There will also be the option of extracting monies to yourself/partners/spouses/children over the age of 18. The main ways of extracting money out of a company are in the form of a salary, interest paid on monies loaned to the company, dividends and also loans taken from company funds, but this would only be advisable in the short term.

Are there allowances that your family are not utilising like:

  • personal allowances
  • interest allowances
  • savings allowances
  • dividend allowances
  • or unused basic rate tax band?

If so with some careful tax planning your overall tax burden could be reduced significantly.

Property investment is a popular way to achieve decent returns on your capital but you should also get capital appreciation, on the basis that over time house price trends always seem to go upwards! It should definitely be considered as part of an overall strategy of diversification of wealth.

What are the negatives?

Well we did a whole blog entitled top ten tips for landlords which looked in depth at many of the downsides of being a property investor. Whatever your position being a landlord will consume time. There is also the risk. Whilst property prices have risen consistently over the long term you could still catch a cold with poor timing or a poor property investment. If you have property it also means that your cash is tied up and is not easily realizable as it can take several months for a property to sell. From a tax perspective the capital gains tax treatment on the sale of properties owned personally is generally better than through a company if you ultimately want to get the profits into your hands.

In short make sure you take advice and take care in buying the right property investment for you!

If you would like to discuss this further then please do not hesitate in contacting

The content in this blog is correct as at 20 July 2022. See terms and conditions.

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