What is Corporation Tax?

Corporation Tax is calculated based on your company's taxable income.

At some point, you may decide that it's beneficial for you to transfer your properties to a private limited company and pay corporation taxes instead of individual taxes.

One of the most common questions that accountants receive is, "Will I be able to save on the corporation tax if I register a private limited company"?

There is no simple answer to this question. There are a number of advantages and disadvantages to owning a limited company, only some of which are related to the corporation tax. It all boils down to what your long-term investment goals are.

Over the years, I've come across investors who have transferred their properties from their name into a limited company, without realizing that stamp duty is payable on the transaction. What they failed to realize is that the tax office considers the transaction to be a sale between two 'connected people', and therefore the stamp duty is applicable.

I've also come across some investors who have purposely reduced the sale price in order to avoid paying higher taxes. However, the tax office is aware of this type of tax evasion. It imposes tax on the transfer at the 'market value' rather than at the value established by the investors.

Investors assume that opening a limited company will limit their financial liability. The problem with this, however, is that mortgage lenders are reluctant to lend money to a newly formed limited company unless a director guarantees the loan. That way, if there is any default on the mortgage payments, the bank will be able to recover its money through the personal guarantees provided by the director.

Depending on your investment strategy, the best time to form a limited company may be at the outset of your investment activities. However, for some people, holding properties under their own name may be more beneficial. Your accountant should be able to identify the most appropriate action for your particular situation and explain the impact of the corporation tax.

Remember, a private limited company is a separate legal entity that carries out its own transactions. Private limited companies are separate from the people who have established them. It's quick and easy to form a limited company. You can do it online within 24 hours.

Let's have a quick look at the pros and cons of forming a limited company.

The Advantages of Forming a Limited Company

1. A private limited company has to pay a 19% corporation tax. A sole trader may come under the 40% tax band.

2. If you don't withdraw your profits from the company, the first £10,000 are tax exempt.

3. Once a limited company has been trading for a number of years, it may be possible to get financing without a director's personal guarantee. This means that, as an individual, you have limited liability for your company's debts and legal liabilities.

4. Company share transfers are taxed at 0.5% for stamp duty. Compare this to the potential 4% stamp duty for a sole trader.

5. Companies benefit from indexation relief on the sale of a property. This reduces the amount of corporation tax to be paid.

The Disadvantages of Forming a Limited Company

1. Companies are not allowed to use the personal capital gains tax allowance (CGT).

2. Companies also lose the private letting relief (PLR), private residence relief (PRL), and non-business taper relief (NBTR).

3. Mortgage lenders require personal guarantees from the company’s directors, at least while the company is new. This means you will not have the benefits of limited liability.

4. A property purchased through a limited company for less than £120,000 is still liable for the stamp duty. In contrast, if you purchase a property as a sole trader, you'll be exempt from the stamp duty.

5. The directors of a limited company have the legal responsibility to prepare accounts and have them filed on-time at the company house. Limited companies also have more paperwork requirements (PAYE set-up and annual returns) which means a greater investment of time and money.

As you can see, there is no simple answer as to whether you should register a limited company to hold your properties or retain them under your own name.

It all depends on your long-term goals. How many properties do you intend to buy and manage? What is your personal income band and how do you intend to utilize your income profits? These are things you need to discuss with your accountant.

Return from Corporation Tax to Property Tax

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