Effective Tax rates in the long term are normally higher when property is purchased through a company.
However, a cash rich trading company has more buying potential than an individual, who would have to withdraw funds (having to pay Income Tax) in order to purchase a property.
Possible advantages in using a company
If trading company is cash rich, then you can use company funds (i.e. prior to to personal taxation) to invest in property.
This means more funds available i.e. don’t have to take cash as salary – losing approximately half of same in tax – to invest. On withdrawing rent/funds – then same taxes apply as as per example below.
Using an existing trading company would tie in the properties with the risks associated with the company i.e if company in financial trouble, then property assets cannot be isolated.
Taxation outline scenario of using a company
Funds invested in company, from personal funds as ‘loan to company’
Tax on rental Profit is Corporation Tax at 25%…plus 15% on undistributed profits (i.e. if not drawn as salary)
Excess can repay ‘loan’ above.
Any funds withdrawn after that are taxed personal tax rate i.e. up to 52%
Therefore potential tax on nett rental income 25% plus 52% of balance ergo EFFECTIVE RATE = 64%
(If you do not take nett rental income as salary, the corporation tax is 40% and eventual liquidation at 33% ergo effectively tax is 60%.)
Capital Gains Tax
CGT on Sale by company is 33%
Then to Withdraw the money from the company, you need to liquidate and will pay a further 33% on the balance.
EFFECTIVE RATE = 55%
Buying Personally or Joint/Partnership
Funds to buy are earned already (having paid tax on income)
Taxes on Rental Profit are income tax i.e. potentially up to 52% (This can be mitigated, if you also have a company by reducing salary take from company)
Capital Gains Tax
CGT on Eventual Sale – 33% of uplift in value.
THE ABOVE IS FOR INFORMATION FOR GUIDELINE PURPOSES ONLY*. IT IS NOT INVESTMENT ADVICE AND SHOULD NOT BE VIEWED IN THIS WAY.
IF YOU WANT TAX ADVICE ON A SPECIFIC SCENARIO, PLEASE CONTACT ME AND WE CAN DISCUSS FURTHER.