Monday 10 April 2023
A common question pondered by property investors is whether to buy investments in a company name or as an individual - & even more so now that corporation tax rates have increased following the 2023 spring budget.
Setting up in either structure will bring its own benefits and drawbacks & is entirely dependent on what your property investing goals are, so let’s explore them in more detail below.
Firstly let’s compare the tax rates…
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Limited Company Tax |
Sole Trader Tax |
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Profits of £50,000 or less |
SMALL PROFITS RATE 19% |
Up to £12,570 |
PERSONAL ALLOWANCE 0% |
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Profits of £250,000 or more |
MAIN RATE 25% |
£12,571 to £50,270 |
BASIC RATE 20% |
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Profits in between £50,000 and £250,000 |
The main rate will taper between these amounts |
£50,271 to £150,000 |
HIGHER RATE 40% *You do not get a Personal Allowance on taxable income over £125,140 |
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Over £150,000 |
ADDITIONAL RATE 45% |
*Figures right as of April 2023
As you can see, the tax% on amounts above £50,000 are more favourable in a Limited company.
When investing in the right properties, you can quickly reach the tax threshold for the higher rate income tax in just a few properties, especially if you have another job providing additional income.
Therefore, if your plan is to invest in many properties and build out your portfolio, a Limited company may be more tax efficient.
However, it’s not just taxes you should take into consideration. Take a look at the below before making any further decisions…
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Limited Company |
Sole Trader |
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A limited company is a type of business structure that has its own legal entity, separate from its owners. |
Self-employed individuals earn income by contracting with a trade or business directly. It is the simplest form of business structure. |
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If you are a limited company, you must file a tax return along with company accounts. |
Being self-employed means you pay your taxes via self-assessment rather than via a PAYE. |
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To start a limited company, you need to register with Companies House and appoint a director. |
As a self-employed person, you have to register with HMRC (this can be done online). Thereafter, you will need to file an annual self-assessment tax return by 31st January each year. |
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A major advantage of operating as a limited company is that if the business gets into financial trouble, then only the company is liable and not the business owner. |
The advantage of being self employed is that there is less hassle of filing tax and other documentation. |
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The disadvantage of a limited company is that there is a lot of admin work, complex legal and reporting requirements. |
The major disadvantage to being self employed is that there is no legal distinction between you and your company. If your business fails, then you are personally held responsible for any debts incurred. |
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It is difficult to take out money from a limited company. |
As the owner of the company, you can withdraw money anytime you require it. |
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Being limited is the most tax-efficient as you pay corporation tax on their profits. |
Being self employed means that you need to pay Income tax on business profits. |
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As a limited company, you can extract money through your company as dividends, providing your limited company is in profit |
As a self-employed individual, financial benefits such as dividends are not typically available to you |
*Information extracted from https://cloudcogroup.com/
Taking everything above into account, we hope you now have a clearer idea of the benefits and disadvantages of each structure and feel more informed to discuss with a professional tax advisor.
This does not constitute as legal advice, please speak to a professional tax advisor before making any decisions.