Ltd company structures for property portfolios.
When considering whether it’s worthwhile to start using Ltd company structures for property portfolios, there are several factors to consider. Often these are described as Special Purpose Vehicles (SPVs).
Within this article, we have outlined the stage at which it might be beneficial, along with the tax advantages and disadvantages of transferring properties to a ltd company compared to holding them in your own name.
The decision of how many properties you should own before considering a limited company structure depends on several factors related to your investment goals, the nature of your properties, and your financial situation.
While there isn’t a specific fixed number of properties that universally indicates the right time to switch to a limited company structure, there are certain guidelines and considerations that can help you make an informed choice.
Guidelines for Considering a Limited Company Structure:
Tax Advantages:
Lower Corporation Tax Rates
Limited companies benefit from lower corporation tax rates (19% as of 2021) on net profits, which can be more favourable compared to individual tax rates.
At the Spring Budget 2021, the government announced that the Corporation Tax main rate for non-ring fence profits would increase to 25% for profits above £250,000.
A small profits rate of 19% was also announced for companies with profits of £50,000 or less.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by a marginal relief. This provides a gradual increase in the effective Corporation Tax rate.
Flexible Estate Planning
If you plan to leave your properties to your family, a limited company structure can offer more options, such as using a family investment company, which can be beneficial for estate planning purposes.
In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.
Depending on how your company is structured, you could add your children and grandchildren as company shareholders. This is achieved by altering the company’s Articles of Association to divide the company’s shares into two classes, A and B shares. The A shares carry an entitlement to dividends and/or capital on winding up equivalent to the current value of the company and are retained by you. The important thing to note here is that when incorporating the company, your current value is equivalent to the nominal value of your A shares. i.e. £1 per share as there are no other assets in the company.
All future growth in the value of the company will accrue to the B shares which will be given to your children or perhaps to a trust that benefits succeeding generations. At this point, there should be no IHT implications inherent in this planning. The new B class of shares will have only a nominal value as initially they have no voting rights, no dividend rights and no capital value above their face value.
Liability Protection
Limited companies provide a level of personal liability protection for the property owner. If you want to shield your personal assets from potential liabilities associated with your investment properties, a limited company structure might be worth considering. This means that your personal assets are protected from the company’s liabilities in most situations.
Shareholders or members of a limited company are only liable for the amount they have invested in the company. Their personal assets are generally protected from the company’s debts and liabilities. This is a fundamental advantage of forming a limited company, as it reduces the financial risk for individual investors.
Industry and Risk
The nature of the industry you’re in, as well as the level of risk associated with your properties, can influence the decision. Industries with higher risks, such as real estate investment, might benefit from the liability protection provided by a limited company structure.
Future Growth and Flexibility
If you have plans to expand your property portfolio or involve multiple partners, a limited company structure can provide more flexibility and accommodate such growth. You can then choose to elect multiple directors within the ltd company structure.
Limited companies have various avenues to raise capital, including issuing shares, attracting investors, and obtaining loans. In the future, these funding options could become more diverse, with advancements in financial technology potentially providing new ways to access capital.
Tax Disadvantages:
Stamp Duty
Transferring properties to a company can result in stamp duty costs. Stamp duty rates for companies are different from those for individuals.
If you’re transferring a property from personal ownership to a limited company (often referred to as “incorporation” of property), there are specific stamp duty rules that apply in the United Kingdom. However, keep in mind that tax laws and regulations can change, so it’s crucial to consult with a tax professional or legal advisor for the most current and accurate information.
Limited companies will always pay the 3% stamp duty surcharge on top of the standard stamp duty rate on any residential property purchased above £40,000. This is the case whether it’s the first property purchased by the company or not.
| Brackets | Rate |
|---|---|
| Up to £250,000 | 0% |
| The next £675,000 (the portion from £250,001 to £925,000) | 5% |
| The next £575,000 (the portion from £925,001 to £1.5 million) | 10% |
| The remaining amount (the portion above £1.5 million) | 12% |
Capital Gains Tax (CGT)
If you transfer a property from yourself to a limited company, you may be subject to capital gains tax (CGT) on the difference between your original purchase price and the sale price. This can potentially offset the savings from claiming full interest tax relief on finance costs.
Corporation Tax on Sale
When you eventually sell a property owned by the limited company, the company pays corporation tax on the profits. The remaining funds after tax will need to be distributed, and additional tax may apply on that income.
When is it Worth Incorporating
If you own multiple properties (typically six or more), transferring them to a limited company could be financially beneficial due to the potential tax savings and relief on rental income. Owning a larger number of properties may allow you to benefit from the potential tax advantages and relief associated with a limited company structure.
You also need to consider how the capital is going to be utilised from the rent. I.e., will you be using this money to live on, or will the income be left within the company itself? If the former, it might be better to hold the properties in your own name rather than incorporating due to the costs of doing so.
However, transfering to a limited company might be advantageous if you’re setting up a property rental business and plan to have a substantial portfolio.
As always, it’s worth while weighing up all the options in order to come to an informed decision.
Considerations
In summary, while there is no specific magic number of properties that definitively determines when to consider a limited company structure, it’s advisable to contemplate this transition when you have a sizeable portfolio, generate substantial rental income, and seek additional liability protection and tax efficiency.
However, the decision should be made based on your unique circumstances and financial goals. Consulting with financial and tax advisors is crucial to evaluate the best structure for your investment properties.
It’s essential to assess whether incorporating your property portfolio aligns with your investment goals, such as retirement planning or passing properties to your family.
