Insights

We are now in the midst of a mini property boom as investors and first time buyers in particular are scrambling to snap up homes before prices rise further. The Government is keenly aware of this, as demonstrated by one of last week’s surprise Budget announcements which became effective almost immediately; from midnight on 19^th March. This was a reduction in the threshold at which residential property bought through a company (or a partnership with a company member) is charged a higher rate of stamp duty. Now, the tax implications of buying property through a company or personally need to be very carefully evaluated.

Any residential property valued at £500,000 or more purchased through either a company or such a partnership, and which is not used for commercial purposes, will attract the 15% penal level of SDLT. Initially introduced for properties with a value of £2m or more, this reduction in the threshold will result in a large proportion of properties bought by London buy to let investors in particular, facing additional charges.

There has long been debate over whether it is better to own rental property personally or within a company. In recent years there has not been a clear answer to this debate – rather ‘it depends’. However this latest development will mean that in many cases company, or indeed partnership ownership will no longer be tax efficient.

In addition to the introduction of a new stamp duty rate, the threshold from which the Annual Tax on Enveloped Dwellings ("ATED") is levied will be reduced from April 2015 to properties worth £1m or more.  This is another tax levy aimed at property investors who use a company ‘envelope’ to minimise tax. From this date the new band will mean that such properties with a value greater than £1m but not more than £2m will be liable to an annual charge of £7,000.

From April 2016, the threshold for ATED will further reduce to include properties valued at £500,000 or more, with the levy payable set at £3,500 for properties having a value greater than £500,000 but not more than £1m.

Those affected will need to file an ATED return by 1^st October 2015 for the first return, with the levy payable by 31^st October 2015 and then subsequent returns must be filed by 1^st April each year, with payment made by 30^th April.

There is a further sting in the tail which is that, in addition, companies and partnerships affected by ATED will be subject to capital gains tax at the rate of 28% on disposal of property.

As a result of these changes, clients need to carefully evaluate whether it is advisable to purchase investment property through a company envelope.

What are the pros and cons of owning a property in a limited company?

Tax advantages of limited company ownership

• Corporation tax is payable on rental income or profits at 21% or 20% rather than income tax, which ranges from 20 to 45%;
• Corporation tax has been payable on profits on property disposal at the rate of 21% or 20%, rather than at the rate of 28% personally. This advantage is removed for companies and partnerships affected by ATED;
• Indexation allowance is available on disposal of a property;
• There has been an opportunity to shelter and reinvest profits at lower rates of tax, although this is now attacked by the increase in SDLT, ATED, and tax payable on disposal.

Tax disadvantages of limited company ownership

• New ruling that all property purchases of £500,000 or more will attract 15% stamp duty charge upon purchase;
•  ATED applies;
•  No annual capital gains tax exemption is available on sale of a property, as it is for personal investors;
•  If rental profits or disposal proceeds are to be extracted from the company, additional personal taxes apply.

If you own investment property and would like to discuss your tax position please contact Lesley Stalker by emailing las@rjp.co.uk.