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.
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
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
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 |
You are required to pay stamp duty land tax (SDLT) when you purchase a property. The SDLT rates are as follows.
| Property price | Residential Rate | Investor Surcharge | Non-UK Resident |
|---|---|---|---|
| Up to £250,000 | 0% | 5% | 2% |
| £250,001 – £925,000 | 5% | 5% | 2% |
| £925,001 – £1.5 million | 10% | 5% | 2% |
| Above £1.5 million | 12% | 5% | 2% |
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% |
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.
