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Using a Limited Company to Save Property Tax

The analysis of whether it is beneficial for a property investor to use a limited company can be complex and this helpsheet aims to identify some of the key advantages in considering a limited company for this purpose.

Any decision must be carefully weighed up after examining your own circumstances.

Here are some advantages of using a company...

1. Low Tax Rates – As of April 2024, Limited companies only pay corporation tax of 19% if your company made a profit of £50,000 or less – known as the ‘small profits rate’ - or at 25% if profits are higher than £250,000. There is a Marginal Relief rate available for profits that range in between – ie £50,000 - £250,000. Contrast that with a higher rate individual taxpayer, who pays tax at 40% or 45%, you’ll see this makes a large difference. If you or your spouse/ civil partner already control another company that existing company could be associated with the property and increase the tax rates for both companies. Also where the sale of property is a capital gain as opposed to trading profits, individuals only pay either 10% capital gains tax or 20% for higher rate taxpayers (unless the gains relate to residential property not eligible for private residence relief in which case the rates are 18% and 24% respectively).
2. Company money box - By leaving money in the company and reinvesting, the tax savings can be used to grow property portfolios at a much faster rate. Property development in particular is a trade and liable to income tax as opposed to capital gains tax and so can be better off in a company. However in the longer term you do still have to consider how you are going to extract your funds in a tax efficient manner from the company, which may incur a further tax charge down the line. When a company sells a portfolio property for a gain, it pays corporation tax on that gain but to extract the funds as dividends there may be a higher rate tax charge depending on your personal tax position.
3. Use of Dividends - by using a limited company, profits can be paid out in the form of dividends which avoids any type of national insurance payment. You can also time the taking of dividends to when you want them and so avoid going into personal higher rate tax bands by leaving the money in the company. You can also utilise the dividend allowance (£500 in 2024/25) where applicable.
4. Ownership transfers - a property held in a company could be transferred more easily by means of share transfers rather than actual property transfers and also saves on stamp duty payments.
5. Property Management Companies - sometimes a limited company is not wanted to hold the property but as a property management company to be used instead to manage the property and divert income into it instead and so save tax.
6. Limited Liability - as always it's not just about the tax savings. Building sites can be dangerous places and tenants can have accidents. A limited company will limit the amount of your liability in these cases.

Whether a limited company is right for your property empire will depend not only on the present circumstances but your plans for the future.

There is an ‘annual tax on enveloped dwellings’ (ATED) for company-owned residential property valued at more than £500,000. This came into effect during 2013. The annual charge starts at £4,400.

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