Investing in a property via a Company

Investing in a property via a Company

Investing in property via a Company
There are various advantages and disadvantages of using a Special Purpose Vehicle company (SPV) to purchase a property. Most of them depend on your current marginal tax rate. If you are a basic rate taxpayer or your spouse, you will pay more overall tax using an SPV. It can be difficult advising on the taxation of property as the government can change the rules on the next budget, but the costs of buying and selling property are high. You may have to decide between paying higher taxes or selling the property back to you again at a loss.
 
Investing via a company should be viewed as a long-term decision. It will likely be unsuitable if you plan to sell the property in the next 5 years. We recommend you speak to a financial advisor before considering investing in property.
                                             
Should I consider using an SPV?
Property income received outside a company is taxed at your marginal rate and is split 50:50 if in joint names. If you are a higher-rate taxpayer, this will be 40%. Where total personal income on your tax return exceeds 100k, due to your rental income, you would also start to lose your personal allowance, which would mean that the property income element would effectively be taxed at 60%.
 
However, if you are a basic rate taxpayer with a total income of under £50k, you are better off keeping a property outside a company structure as your marginal rate is 20%. The corporation tax rate will be 25% from 1 April 2023, less marginal relief for small profits. The marginal relief will not apply if the property is not commercially let or merely held as an investment. The basic rate tax on dividends is an additional 8.75%; however, if you are a higher-rate taxpayer, you must pay 33.75% to extract the profits.
 
An A&B share set-up would enable you to distribute the dividends to a spouse as you wish and provides the maximum flexibility for tax efficiency.
 
Even if you are earning over £50k, it would be debatable which would be more tax efficient and require further analysis of your long-term expectations of income and retirement plans for you and your spouse. Factors for consideration include any mortgage interest (allowable in companies) and expected annual rental profits.

Associated Companies
Opening a second company could increase the corporation tax you pay if you already own another company. Please see our article here on the associated Companies rules. 

Double taxation on sale
One disadvantage of company property is when it comes to selling the property. Any gains on disposal will be chargeable to corporation tax. You still need to extract the money out of the company as either dividend or salary, which would be at your marginal rate - taxing you twice! If you sold a property you own privately, you would have an annual exemption of £6,000 for 2023-24 if you have no other capital gains in the year. If held jointly with your spouse, the gain on sale would also be split 50:50, and you both would have an annual exemption.
 
Loss of BADR
No tax reliefs exist for investing in property if you also have a trading company. You cannot get capital allowances on the property, which will not reduce your company corporation tax.
 
Typically, if you invest more than 20% of a trading company’s assets, the company will be deemed an investment company for Business Asset Disposal Relief and will deny the 10% tax rate on the first £1million on a future wind-up. As a trading company where you have held the shares and been a director for two years, you can access the cash at 10% under this relief as opposed to the standard 20%.
 
You do not need to do anything specific to become an investment company; instead, it automatically happens if the company has more than 20% in investments. The 20% can be calculated as HMRC deems - it can be turnover, your management time, or assets of the business. 

Note that the bar for being an investment company for BADR is lower than the threshold required for being an investment company for corporation tax where the higher rate at 25%, with no marginal relief applies.
 
Second company for property
One way around preserving the trading company status and BADR availability, if you have a cash-rich trading company, is to invest in property by forming an SPV and making an intercompany loan from your original trading company to the property company to finance the purchase. You would not be able to close your trading company while the loan is still outstanding, but there would be no tax consequences for this loan. If you stop trading in your original trading company, you will also lose the availability of BADR on your trading company after 3 years has elapsed.

Annual Tax on Enveloped Dwellings (ATED)
Companies which own property that is used, partly used or even could be used for residential purposes is classified as a 'dwelling' and if the company holds a property worth at least £500,000 it will need to file an annual return and may be subject to pay a flat rate of tax, known as ATED. For properties valued at £500k-£1m the charge is £4,400 for 2024-25. Property which is let commercially, and not let to connected individuals who own or run the company as well as property being redeveloped should be covered by an exemption. If your property is worth more than £500k you should still register and claim the relevant exemption. You must revalue your property every five years in line with the legislation. 

Stamp duty
Companies have to pay additional rates of stamp duty land tax (SDLT). This may be as high as 15% if the property is not let out and is increased to 17% if the company is controlled by someone who is non-resident. If you already own the property personally, and are considering incorporating, you will need to sell it to the company attracting further stamp duty charges. We do not advise on stamp duty land tax and recommend you speak with a solicitor for further information.

Borrowing
Most mortgage brokers will not give a buy-to-let loan to a trading company and will insist on a second property company. If you need to borrow, this will likely be your only option other than buying it personally.
 
Financial advice
We can also put you in touch with a broker for SPV mortgages or a financial advisor regarding investments. We cannot advise if buying property is suitable for you.
 
 



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