Company and partnership property
Written by Ray Coman
Ownership of a property via a company is often considered in tax planning, however it is rarely advantageous. Until March 2012 companies were widely used for the avoidance of stamp duty. However, companies are now liable for stamp duty in the same way as individuals.
Double tax charge
Where a company owns a property there is a significant drawback for tax purposes. On disposal of the property, any increase in value would be subject to corporation tax, and on extraction of profit, further tax could be due on the dividends. This is known informally as the 'double tax charge'. A company owning only residential property would be a close investment holding company and therefore subject to the full rate of corporation tax. Where residential property is let to a connected person, such as a family member, the full rate of tax would not necessarily apply.
There is no annual exemption available to companies, only an indexation allowance to inflation adjust any gains based on the retail price index. The RPI is not related directly to house prices.
A company is often used to avoid national insurance that would otherwise be payable by a sole trader or partner in a partnership. However, property income is not subject to national insurance. Therefore, the tax incentive for a self-employed person to use a company would not be open to a landlord.
Notwithstanding the above, a company can be a tax efficient method for diverting dividends to shareholders taxed a lower marginal rate. To this extent a company can be used to save tax where a property is owned by a consortium, say, of family members. Similar structures such as an LLP may achieve the same end.
Property management companies
A property management company could effectively divert rental income to family members at a lower marginal rate of tax, while the property is not held by the company. This would avoid the double tax charge.
Individual ownership or ownership by a partnership enables a taxpayer to reduce capital gains tax by using any capital losses incurred by that individual in the past. In general, corporation tax losses can only be set against corporation tax profits of the preceding twelve months, or of future corporation tax profits, if any.
Property ownership through a partnership
Each partner in a partnership is taxed in the same way as a stand lone landlord on their share of rental profits. From a tax perspective there is no difference between receiving a share of rents from a partnership and a share of rents from a jointly owned property. Consequently, partnerships would be used to formalise agreements between property owners.
Structures for property ownership can be set up for a variety of reasons. However, it is prudent to seek separate advice on the tax implications before committing to a course of action. Coman & Co would be pleased to assess your plans and advice accordingly.