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Property investment can be conducted through a limited company or as a private individual, each with tax implications. Understanding the differences between these two options can help you make informed decisions on the most suitable investment structure for your circumstances.
Corporation Tax vs Income Tax: When you invest in property through a limited company, the profits are subject to corporation tax, while investing as a private individual means paying income tax on rental income. Corporation tax rates are generally lower than income tax rates, which may make investing through a limited company more appealing for higher-rate taxpayers.
Dividends vs Rental Income: If you invest in property through a limited company, you can take your profits as dividends. Dividends are taxed at lower rates than rental income, providing another potential tax advantage over private property investment. However, remember that dividends may not qualify for specific tax allowances available for rental income.
Mortgage Interest Relief: As a private property investor, the mortgage interest relief you can claim is restricted to the basic rate of income tax. In contrast, limited companies can claim the full mortgage interest as an expense against their corporation tax. This may result in significant tax savings for limited company property investors.
Capital Gains Tax (CGT): Private investors are subject to capital gains tax on any profits when selling a property, with a personal CGT allowance available each tax year. Limited companies, on the other hand, pay corporation tax on capital gains without a separate allowance. However, limited companies can benefit from indexation allowance, which adjusts the cost of the property for inflation, potentially reducing the taxable gain.
Inheritance Tax (IHT): Both private and limited company property investments are subject to inheritance tax. However, limited company shares can be more easily transferred or gifted, providing more flexibility in estate planning. Additionally, business property relief may be available for limited company investments, reducing IHT liability.
Stamp Duty Land Tax (SDLT): Stamp duty land tax rates are generally the same for private and limited company property investments. However, limited companies purchasing residential property may be subject to a 3% surcharge on the total purchase price, regardless of the property value.
Ultimately, deciding between investing in property through a limited company or as a private individual depends on your circumstances and financial goals. Therefore, it is essential to consult with a professional tax adviser to determine the most tax-efficient investment structure for your situation. If you are a Landlord and looking for advice on tax planning, please call our office on 08001357323 for specialist advice.