Finance and Taxes

Property Investment Experts | ERE Property

The choice of business structure has a profound impact on the success and financial returns of your property investment. Familiarising yourself with the options and weighing their benefits and disadvantages will help you to choose the best structure for you.

Finance and Taxes - Investment Property. ERE Property

Limited companies

A limited company refers to a business operated by a private organisation, distinct from its owners. Typically, it involves a director(s) who oversees the company’s operations, while shareholders own and hold influence within the organisation. A limited company carries legal responsibilities, entitlements and must file a tax return along with company accounts. To start a limited company, you need to register with Companies House and appoint a director.

Benefits and disadvantages

  • If the business gets into financial trouble, only the company is liable and not the business owner.
  • Easier to grow.
  • More allowances and deductibles can be claimed against profits such as mortgage interest.
  • More difficult to take money out to pay yourself.
  • More complex reporting, set up and legal requirements. Hiring an accountant is recommended.
Finance and Taxes - Investment Property. ERE Property

Sole trader

A sole trader is an entity where a single individual manages the business. As a sole trader, you assume full personal responsibility for any financial gains, losses, and obligations incurred by the business. Should the business default on a debt, a sole trader may be personally liable. Sole traders pay taxes via self-assessment and must complete an annual self-assessment tax return each year.

Benefits and disadvantages

  • Easier to set up and maintain as legal requirements aren’t as comprehensive.
  • Money can be withdrawn easily whenever it’s required.
  • If your business fails, you are personally liable for any debts incurred.
  • May pay more tax as there are fewer deductible allowances. Mortgage interest cannot be deducted.

Capital gains tax

When you sell your residential property, you will need to pay capital gains tax (CGT) on any capital gains over your annual tax-free capital gains allowance. See below.

Capital gains is calculated using the following formula.

Sale Price – Purchase Price – costs (broker fees, stamp duty, home improvements) = Gains

Basic-rate taxpayers pay 18% on any gains made and this increases to 28% for higher or additional-rate taxpayers.

CGT allowance for an individual £12,300
Couple’s allowance (married or in a civil partnership only) £24,600

Stamp duty and land tax

You are required to pay stamp duty land tax (SDLT) when you purchase a property. The SDLT rates are as follows.

Purchase price Rate on main residence Rate for additional properties
Up to £125,000 0% 3%
£125,001 – £250,000 2% 5%
£250,001 – £925,000 5% 8%
£925,001 – £1,500,000 10% 13%
£1,500,001 + 12% 15%

Income tax

You will need to pay income tax on any rental income or, if purchasing through a limited company, any salary and company dividends you receive. The amount payable can be reduced by offsetting allowable expenses such as lettings fees, ground rent and maintenance. See the income tax bands below to find out how much you’ll pay.

Band Taxable income Tax rate
Personal allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate over £150,000 45%

Corporation tax

When purchasing through a limited company, you will need to pay corporation tax on any company profits. Again, the amount payable can be reduced by offsetting allowable expenses. The key advantage of a limited company purchase over a sole trader purchase is that mortgage interest is an allowable expense. The rates you’ll pay are as follows.

Profits of £50k or less = 19% (Small Profits Tax)

Profits of £250k or more = 25% (Main Rate)

Profits in between £50k and £250k = The main rate will taper.

Disclaimer: E.R.E Property are not financial or tax advisors and the content on this page should not be taken as advice. Before making any investment decisions please speak to appropriate professionals.

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