UK Property business, to incorporate or not to incorporate

To Incorporate or Not to Incorporate? A Tax Round-Up for Property Investors

Investing in property can be a rewarding venture, but one of the most confusing decisions many investors face is whether to hold their property portfolio as an individual or to incorporate it as a company. With ever-changing tax rules and a barrage of conflicting advice, it’s no wonder that many property owners feel overwhelmed. In this blog, we’ll break down the key tax considerations and compliance requirements to help you decide on the right structure for your property business.

Understanding the Tax Landscape

When it comes to property taxation in the UK, there are several key areas where individual and company ownership differ. For rental profits, individual owners are taxed under the income tax system, with rates that can reach 40% or even 45% for higher-rate taxpayers. On the other hand, companies pay Corporation Tax at rates varying between 19% and 25%. While this might seem like a straightforward saving on paper, the true picture is more complex.

Mortgage Interest Relief and Rental Profits

One major difference is the treatment of mortgage interest. Individuals can only claim a 20% basic rate tax credit on their mortgage interest—this can be a significant disadvantage if you’re a higher-rate taxpayer. Companies, however, benefit from fully deducting mortgage interest from their rental profits. Yet, this advantage comes with its own set of challenges. For instance, drawing profits out of a company often involves taking dividends or a salary, which may trigger additional personal tax liabilities, sometimes reaching rates as high as 39.35% on dividends or subject to Income Tax and National Insurance on salaries. For this reason decisions are made on a case by case basis by comparing tax computations in both scenarios to decide which is going to be more tax beneficial.

Capital Gains and Disposal Considerations

Capital Gains Tax (CGT) is another important factor. Individuals enjoy an annual CGT exemption and may pay 18% or 24% on any gains, depending on their income level. In contrast, companies dispose of assets at Corporation Tax rates (generally 19%-25%), but they lose out on the annual exemption. Additionally, companies face indexation benefits frozen since January 2018, making timing and asset value appreciation crucial considerations. Where a property can be seen as a business asset, CGT reliefs may also apply. However the HMRC definition of a business asset (a type of property which is eligible for CGT relief) is very specific so this is determined on a case-by-case basis.

The Extraction Dilemma

A key point of confusion for many property investors is the extraction of profits. For individuals, once the rental profits are in your pocket, you face no extra tax on extraction. However, if you incorporate, extracting profits from your company can result in an additional layer of tax. Dividends come with their own tax charges and taking money out as salary can mean facing Income Tax and National Insurance contributions. This “double taxation” effect can erode any apparent tax advantages gained through incorporation.

Stamp Duty, ATED, and IHT

There are also differences in other property-related taxes. Stamp Duty Land Tax (SDLT) for individuals now includes a 3% surcharge on additional residential properties, whereas companies are subject to standard SDLT rates—with a potential 15% flat rate on properties valued over £500,000.

Similarly, Annual Tax on Enveloped Dwellings (ATED) applies only to companies owning high-value properties (over £500,000), whereas individual investors do not face this charge. ATED charges on property held via a company can range from £4,150 - £269,450 per year!  Without taking all taxes into account, the 'savings' gained by incporproation can very quickly be wiped out.

When it comes to Inheritance Tax (IHT), the situation is also complex; while individual property values are subject to IHT within an estate, companies can offer more nuanced planning options, though they require careful structuring to realise any benefits.

Administrative and Compliance Considerations

Beyond the immediate tax rates and reliefs, the administrative burden differs markedly. Individual property owners deal primarily with Self Assessment tax returns and CGT calculations, which, though not trivial, are less onerous compared to the compliance requirements for companies. Incorporated property businesses must file annual accounts, a CT600 tax return, and confirmation statements under the Companies Act 2006, adding layers of complexity and ongoing costs.

Making the Decision

So, which structure is right for you? The answer isn’t one-size-fits-all. If you’re a landlord who values simplicity and has relatively straightforward tax affairs, remaining as an individual might be your best bet. However, if you’re planning to expand your property business, invest significant capital, and can manage more complex accounting and compliance requirements, incorporation could offer tax efficiencies—provided you’re aware of the hidden pitfalls.

At Travel & Savings, we understand the nuances and challenges you face. Our team of experienced tax advisers is here to help you navigate this intricate landscape and tailor a strategy that aligns with your long-term goals. Whether you’re considering incorporation or sticking with individual ownership, getting the right advice can make all the difference in safeguarding your profits long into the future.

Feel free to reach out for a free, no-obligation consultation, and let’s explore the best tax strategy for your property business today!

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