Can I use a company to manage my property portfolio?

Is there any merit to managing your property portfolio using a company rather than owning the properties outright? The last few years have seen a few changes to the taxation of rental properties and the changes continue to take effect in the next couple of years. See my blog here for more information on the recent changes. Companies are not subjected to all of these changes so using a company to manage property is becoming increasingly popular.

In order to move your existing property into your company, you will effectively need to sell it to the company. Therefore, if you transfer existing properties in you will have to pay capital gains tax on any gain arising at 28% as well as incurring stamp duty, early redemption fees on your mortgage, solicitors and accountant fees. It almost certainly isn’t worth either the effort of doing it or the expense.

If you are purchasing new properties for your portfolio then it may well be worth considering whether buying the property via a company may be a good option for you.

What are the advantages of using a company?

If you are a higher rate taxpayer or are expecting to be in the future, you will benefit from taking dividends rather than being taxed at the higher rate on your rental income and also being able to manage your income for the year from the properties. By operating using a company you can control when and how much income you take out and therefore the tax rate incurred. This is especially useful when your income is around certain thresholds such as £50,000 when child benefit starts to be clawed back.

Where properties are owned by a company, the income generated is subject to Corporation Tax (currently 19%, increasing to 25% depending on the level of profits) rather than income tax. Companies are not subject to the restriction of finance costs and a full deduction of mortgage interest is allowed in computing the taxable profits. However, it can be harder and more expensive to get funding for your property via the company so the net income from the property may be lower as a result.

Even when the company sells the property there are benefits. A company will pay corporation tax on the chargeable gains, the rate of 19% (or a sliding scale up to 25% since 2023) may be more favourable than the 24% capital gains tax rate for properties owned by individuals depending on the size of the gain. However, there is no annual exempt amount for a company, whereas individuals now have an annual exempt amount of £3,000.

Another advantage of using a company to manage your properties is that it is easier to manage the ratio of ownership in the properties by adjusting the share capital. This doesn’t prevent a potential capital gains tax arising on the value of the shares, but the process of transferring shares is not as onerous as transferring the individual properties.

And what are the downsides?

As mentioned above, getting a mortgage on an investment property is harder and more expensive than a buy-to-let mortgage so the net income from the property is likely to be lower.

In addition, the administration of a company is more onerous than simply calculating your rental income for your self-assessment return. Accountancy standards need to be applied and your full accounts attached to your corporation tax return, as well as making annual submissions to Companies House. If the company owns any properties valued at £500,000 or more it will become subject to the Annual Tax on Enveloped Dwellings. Where the property is rented out at a commercial rent the company should be able to claim relief from this, but it still contributes to the administration required to manage the company.

If you are not a higher rate taxpayer, the combination of corporation tax of 19% (or higher) and the dividend rate of 8.75% is approximately 25% in total, which is higher than the basic income tax rate of 20%. Therefore, you will end up paying more tax by using the company. This may be mitigated by the extra control over when and how the funds are extracted from the company, something that is not possible when the properties are owned by individuals. If you are planning to use the property yourself, a benefit in kind may arise if you don’t pay full market rent to use the property.

Whether or not there are advantages to using a company to manage your property portfolio depends on the circumstances of the individuals concerned. There are aspects of managing property through a company that may be attractive despite the additional expenses that may be incurred, even if you are not a higher rate taxpayer.

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