If you already own property, you will have to transfer it to your limited company. If the property is worth more than you paid for it, you could be liable to capital gains tax (CGT) when it is transferred to the limited company. This CGT position applies whether you gift the property or sell it to the company for full market value. There is a form of ‘holdover’ relief from CGT when a business incorporates. However, if the degree of involvement in the properties is not enough for the activities to amount to a ‘business’, it seems unlikely that this relief will be available.
If you do not own any residential property yet, then subject to any commercial considerations such as loan finance, you could introduce funds to the company to enable it to purchase the property instead. This avoids the above CGT complications. Whether you are buying the property personally or through the company, there may be some Stamp Duty to pay. This also applies even if you already own the property, and decide to gift it to the company.
Profits could be extracted from the company by salary or dividends, which will be taxable income in your hands. Dividends do not attract NICs, and the maximum tax liability on dividends for a higher rate taxpayer is 32.5%, with 10% tax deemed at being paid at source. This compares favourably with a maximum 40% tax rate on rental income from property owned personally.
A disadvantage of company ownership can arise if a property is sold, in the form of an effective double tax charge. The company is liable to corporation tax on any capital gain if the property has increased in value. A further tax charge then arises when the net sale proceeds are distributed to the company owners, whether by salary or dividends. By contrast, if the property is owned individually, there will be a single tax charge, taxable at rates of 18% or (perhaps more likely) 28% depending on whether you are a basic or higher rate tax payer.
The calculation of a gain on property differs according to whether it is owned by the company or personally. For example:
Individuals may deduct the annual CGT exemption, this exemption is not available to companies;
Companies may deduct an allowance for the effects of inflation on the cost of the property (‘indexation allowance’), whereas individuals may only claim this allowance for periods of ownership up to April 1998.
If you hold the shares in a company that owns property, you could sell the shares in that company, instead of (for example) the company selling the property and then deciding whether to continue with the company or wind it up. There are stamp duty reasons why it may be attractive for a purchaser to buy the shares in a property company, rather than buy the property directly. However, your share disposal would still be liable to CGT, subject to any annual CGT exemption not otherwise used.
There is no ‘clear cut’ answer to the question whether residential property should be owned personally or by the company! Every case should be considered separately, based on individual circumstances. My advice would be to work through the buying, renting, and selling implications in advance using projected figures if possible, and to obtain professional assistance from us if you require more detail, please just call!