Direct investment in property can be structured in several ways. The most common are ownership as an individual (or partnership, including LLPs) or through an investment company limited by shares. Other options, such as using a trading company or a pension scheme, may also be available depending on circumstances.
While recent tax changes have focused largely on residential property, commercial property has remained relatively stable from a tax perspective. One notable exception is the extension of the UK capital gains tax (CGT) regime to non-resident owners of UK commercial property.
This newsletter highlights the key differences between individual/partnership ownership and company ownership, along with practical considerations for investors.
Individual vs Company Ownership – Key Differences
Legal Identity and Liability
A company has its own legal identity, meaning contracts are entered into by the company rather than the individual shareholders or directors. This allows the company to continue regardless of changes in ownership or even the death of a shareholder.
A major advantage of a company structure is limited liability. Shareholders are generally only liable up to the amount invested in the company, unless personal guarantees have been given. This contrasts with sole traders and partnerships, where personal assets may be exposed to business liabilities.
Practical point:
Although companies offer limited liability, lenders often require personal guarantees from directors. In addition, buy-to-let mortgage rates for limited companies are typically 0.5% to 1% higher than for personally owned properties.
Taxation Considerations
Company Ownership
Property investment through a company has become increasingly popular, particularly due to the full deductibility of interest and finance costs. Unlike individuals, companies are not subject to restrictions on interest relief, whether the property is residential or commercial.
Corporation tax rates depend on the level of profits:
19% small profits rate (profits up to £50,000, where there are no associates)
25% main rate (profits over £250,000)
Marginal relief applies to profits between these thresholds
Rental profits retained within the company are taxed at these rates.
Individual or Partnership Ownership
Where property is owned personally or through a partnership, rental profits are taxed as investment income at the individual’s marginal income tax rate, which can be as high as 45%.
Non-Tax Reasons for Incorporation
Incorporation may be attractive for reasons beyond tax efficiency, including:
Limited liability protection
Easier access to funding by introducing new shareholders
Ability to make company pension contributions
Long-term project and succession planning
No restriction on the number of shareholders (unlike direct land ownership, which is limited to four legal owners)
Family Investment Companies (FICs)
Family Investment Companies are increasingly used by business owners looking to pass wealth to the next generation.
An FIC allows parents to:
Retain control through voting shares
Pass economic value to children via non-voting or alphabet shares
Avoid fragmented ownership of property assets
Provided shares are gifted and the donor survives for seven years, inheritance tax may be avoided. Rental profits generated within the FIC are subject to corporation tax.
Practical point:
Where directors lend funds to an FIC, repayments can be made tax-free up to the amount originally lent. Care is required where funding comes from a trading company, as excessive investment activity could affect its trading status.
Partnerships
Genuine partnerships offer flexibility in allocating profits and losses, which can be particularly useful where property is jointly owned. Profit-sharing ratios can be changed from year to year by agreement.
Partnerships may also allow access to capital gains tax reliefs and inheritance tax reliefs that are not available to companies, subject to conditions.
However, stamp duty land tax (SDLT) can arise when forming a partnership, changing profit-sharing arrangements, or as part of a future incorporation.
Limited Liability Partnerships (LLPs)
LLPs combine features of companies and partnerships:
- Separate legal personality
- Limited liability for members
- Transparent tax treatment
Members are taxed personally on their share of profits and gains, potentially at rates of up to 45%, and National Insurance may also apply. LLPs are often used to hold property portfolios, with planning opportunities through profit allocation to lower-tax-rate members.
Note:
There is no one-size-fits-all solution when investing in property. The optimal structure depends on:
- Tax position
- Financing requirements
- Risk appetite
- Succession and inheritance planning
Disclaimer :
This newsletter is for general information only and does not constitute legal, tax, or financial advice. It is based on current UK legislation, which may change. You should seek professional advice specific to your circumstances before taking any action. We accept no responsibility for any loss arising from reliance on this information.
