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Investment Property Accountants

An Alternative Way of Buying Investment Property – A Limited Company

As stated in our previous article, Plug The Leaks – Vital Tax Efficiencies, there are various tax issues which should be considered when undertaking property investment. A key question is how to undertake any such purchase? Of course these may be made personally, however, one should carefully examine the options to acquire via a Limited Company or through a pension via a Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS). Here we will take the opportunity of examining in some detail the option of utilising a Limited Company for the purpose of property investment.

A property investor may either form a new company and provide it with initial funding to make purchases or utilise an existing company. Either are valid options but one should be careful of two issues. The first is that those lenders that are prepared to offer buy to let facilities to Limited Companies require the company to be a Special Purpose Vehicle (SPV) with an appropriate Standard Industry Classification (SIC) code to be relating to property investment. Admittedly the number of lenders in this market is rather limited. This is even more so given the current economic climate and the number of lenders that have withdrawn from the market. Therefore, if an existing non-property investment related company is to be utilised, it should be accepted that a small number of lenders will not be available and commercial lending will generally be required to satisfy funding requirements, which can prove to be more expensive.

The second issue of which to be aware is that regarding the associated company rules. Where a shareholder enjoys control, either directly or indirectly through a spouse or family, of more than 50% of two or more companies, the first £300,000 band of profit, that would normally be taxed at 21%, will be apportioned across the companies. Where two companies exist, only the first £150,000 of profit would be taxed at the lower rate, three companies £100,000, and so on. This should, therefore, be approached with caution, as lack of planning may give rise to a higher than necessary Corporation Tax liability on the combined profits of the companies in question.

Unlike personal ownership, there are formalities involved in operating as a Limited Company. Those formalities are set out in the Companies Act 2006. Shareholders and directors have different rights and responsibilities even if they are the same persons. Each year the company must file an annual return and submit accounts to Companies House, and the format of the accounts is governed by law.

In return for the formalities that go with incorporation, the shareholders benefit from limited liability and so creditors cannot seize their personal assets if the business fails. Many see this as a significant advantage as compared to direct ownership. This alone may influence some investors to consider this option.

Another advantage is image. Suppliers and others tend to view a Limited Company as having more substance than a sole trader or partnership.

It is important to consider the structure of property investment activity to be undertaken as the resulting tax liabilities can strongly influence the decision regarding the most appropriate medium. All returns from property investment within a Limited Company will be subject to Corporation Tax. This is likely to be at a rate of 21% at the outset or 29.75% on profits in excess of £300,000 for the successful, well established investor. This compares with 20%, or more likely 40%, Income Tax on rents and trading profit or a flat rate 18% under the new Capital Gains Tax (CGT) rules on capital growth.

The use of a Limited Company also grants the investor / shareholder control over their personal income, and consequently tax liabilities. Income may or may not be drawn as appropriate and furthermore, dividends may be declared as opposed to salary or bonuses. This is effective in regards to both personal Income Tax and National Insurance and it is this control which may influence those investors already subject to higher rate income tax.

Of course there are additional administrative burdens that come with incorporation, however, property accounts will need to be prepared in one format or another, whichever means of purchase is adopted and a good accountant will ease this burden.

It is fair to say that there is no default option when it comes to property investment, as each will be appropriate to the individual circumstances and likely investment activity of the property investor. We would welcome the opportunity of discussing your specific needs and requirements and advising you accordingly. Please feel free to contact Peter Edwards or Tim Warr in this regard.

Date of Article: 2nd December 2008

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This domain is owned by Warr & Co Chartered Accountants which is a member of the Institute of Chartered Accountants in England & Wales (ICAEW). Whilst the information detailed here is updated regularly to ensure it remains factually correct, it does not in any way constitute specific advice and no responsibility shall be accepted for any actions taken directly as a consequence of reading it. If you would like to discuss any of the points raised and / or engage our services in providing advice specific to your personal circumstances, please feel free to contact Peter Edwards on 0161 477 6789 or email us at info@warr.co.uk

 

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