Stamp Duty Levies: Worth Investing in Property Through a Limited Company?
A swiftly changing tax landscape is adding more confusion to the pros and cons of purchasing a rental property as an incorporated company vs as a private individual.
Many landlords have opted to transfer ownership of property assets to an SPV, a limited company specific to the property letting sector. However, where the rental property belongs to an existing company owner, they might decide to transfer ownership or invest in a new property through their commercial business.
In this guide, the Tod Anstee team explores all the options, with comparable information to help you make informed decisions about which property ownership structure is right for your portfolio.
Stamp Duty Rates for Limited Companies, SPVs and Individual Property Investors
Stamp duty is payable by the property investor at the point of acquisition, but rates vary depending on your tax position and legal ownership status.
Limited companies pay commercial stamp duty at 15% if the property is intended as residential accommodation and costs over £500,000. A 3% surcharge is automatically added, plus a further 2% if the buyer is not a UK resident.
However, the purchase may qualify for a different treatment if:
- The business is a property rental company, for example, an SPV, AND
- The property is expected to generate a profit (e.g., not leased free of charge to a family member or employee).
This factor is one of the key contrasts between investing in property as an SPV and buying rental assets through an incorporated business with another purpose. SPVs pay the standard stamp duty rates plus a 3% second homes surcharge on any acquisition of any value over £40,000.
Note that the 3% applies regardless of whether you, or your company, already own a private property.
Individual investors pay these same standard stamp duty rates and are also normally subject to the 3% second homes surcharge. Private investors, unlike companies, can claim exemption from the second homes levy if they do not own the home they live in or any other residential property.
Stamp Duty Rates for Companies
Companies pay stamp duty at a standard higher rate of 15%, plus a 3% surcharge if they purchase a residential property. This rate applies to investments of over £500,000 made by companies, partnerships where one partner is a company, and investment schemes.
SPVs pay the normal stamp duty rate as below, plus the 3% surcharge.
Stamp Duty Rates for Private Individuals
Stamp duty thresholds changed on 23rd September 2022 and will remain as follows until 31st March 2025, any further announcements notwithstanding.
Property investors who purchase residential accommodation as a private individual pay these rates, plus 3%, if they already own another residential property.
Up to £250,000
£250,001 – £925,000
£925,001 – £1.5 million
Over £1.5 million
The Tax Advantage of Owning a Rental Property Through a Limited Company
An SPV works like any other limited company but is designed for rental property ownership rather than a trading business, with financial benefits linked to stamp duty.
Changes to mortgage tax relief have driven more landlords to consider managing their property business through a limited company. The ‘sliding scale’ gradually reduced the amount of mortgage interest and other expenses self-employed landlords could deduct from their taxable profits to zero.
Landlords that pay tax as a company rather than as an individual can deduct 100% of their mortgage costs from their revenue before calculating a net profit against which they pay corporation tax rather than income tax.
Generally, corporation tax and dividend tax rates are lower than income tax, but particularly for higher and additional rate taxpayers. For landlords with high-value portfolios the difference in tax exposure can be as great as 40%.
However, it is also important to remember that company owners still need to pay income tax on any profits they transfer to themselves from the business. It is advisable to speak with an independent financial adviser to calculate how transferring property ownership might impact your overall tax position.
Other Tax Considerations for Landlords
While there are clearly multiple, potentially complex factors to consider, additional tax system elements could impact your decision. Stamp duty and income tax are only two tax obligations associated with owning a rental property through any ownership structure.
In April 2023, dividend allowances will drop from £2,000 to £1,000 – this is the amount a company owner can pay themselves from their business tax-free, as a separate allowance to the annual personal allowance, which relates to income tax.
That means company owners and shareholders will pay more tax on dividends they distribute to themselves from their profits.
Corporation tax is set to increase from 19% to 25%, although smaller businesses with profits of £50,000 or less will remain at the current rate.
Those with profits of £250,000 or more will switch to the higher tax rate from April 2023, and moderately sized businesses will pay somewhere between the two, calculated on a marginal relief system.
Income tax is also due to increase, with lower bands frozen, and the threshold for the additional rate dropping from £150,000 to £125,140 – private landlords with higher profitability will pay an extra 5% income tax on any profits between those values.
Capital Gains Tax
Another reform due to hit in April 2023 is the cut to capital gains tax allowances, dropping from £12,300 to £6,000 and again to £3,000 in April 2024. Landlords pay capital gains tax when they sell a property based on the profit made.
Property owners who intend to sell portfolio assets this year may wish to proceed quickly to avoid paying an additional £6,300 on the net gain.
The positive for incorporated companies is that there are several business allowances, such as Business Asset Rollover Relief. If a landlord sells a property and replaces it within three years, they may be able to delay paying capital gains tax.
Owning a Rental Property Privately vs Through a Company
This long list of considerations demonstrates why there isn’t a clear-cut answer. Although stamp duty rates make the cost of owning a rental property through a business appear less attractive, this option may remain the most tax efficient.
It is important to work through every element carefully before making any decisions about how you own and manage your portfolio.
Please contact Tod Anstee at any time if you would like to arrange a more detailed conversation about any of the information contained within this guide, or speak with your accountant or financial adviser for advice on your tax exposure and the most suitable route to take.