Property Company Tax Explained
Thinking of setting up a property company but don’t know how the tax works? We show you how…
Any property company needs to pay tax.
Holding investment properties in a limited company can be very advantageous for some, but not for others.
Once the decision to set up a company (or ‘incorporate’ as it is also known) has been made, it is important to understand how the property company tax works.
The first point you need to understand is that the limited company is a separate legal entity to the owners (shareholders).
So the shareholders own the company, the company in turn owns the property.
There are three ways a company can earn profit from property:
- Buying renovating and selling – also known as flipping. This is trading income
- Generating rental profits. This is investment income
- Buying, holding and selling. This is a capital gain
For a company registered in the UK, the tax on all three sources is called Corporation Tax and they are all taxed at the same rate – currently at 19%.
The corporation tax payable is calculated based on the profit shown accounts which are prepared for an accounting year.
For many companies the accounts are prepared for the year ended 31 March, but it can be any accounting period set by the directors and confirmed by Companies House.
Note – it is common for the accounting profit to be different from the tax profit, because tax rules and accounts rules aren’t always the same.
For this reason it isn’t always easy to work out the tax payable from the company profits.
Corporation tax is generally payable nine months and one day after the year end.
For a company with a March year end, the due date for corporation tax would be 1 January.
HMRC will charge interest on late payments, and it will also pay interest on any tax paid early (at a much lower rate).
Once the company has paid its tax bill, the remaining profits can be paid out to the shareholders as a dividend (sometimes called a ‘distribution’, which means distribution of profits).
Dividends are declared by the company directors and sometimes need to be approved by the shareholders, though with most small companies the shareholders and the directors are the same people.
A dividend is the personal income of the shareholders and will be taxed in accordance with the tax rules relating to the taxpayer’s own tax residence. UK tax residents will pay Income Tax based on the following rates:
- The first £2,000 = 0%
- Basic rate taxpayers = 7.5%
- Higher rate taxpayers = 32.5%
- Additional rate taxpayers = 38.1%
Dividends paid to overseas taxpayers are paid gross, just the same as they are to a UK taxpayer.
In other words there is no withholding tax to worry about.
However there is no obligation to pay a dividend at all.
A company can store up it’s reserves of profits for many years, keeping them within the company to use on growing a property portfolio, for example.
The shareholders will be faced with a number of options over the years, which could include:
- Liquidating the company. This happens when a company has finished its useful life and the profit is distributed, once all the assets have been sold and the liabilities settled. This is dealt with under Capital Gains Tax rules for UK taxpayers
- Pass the shares on. Shares in a company are an asset in their own right which the shareholders can pass on under the terms of a will or other document, for example to a member of their family. In the UK this is taxed Under the Inheritance Tax rules
- Sell the shares to a third party. Again, this is dealt with under Capital Gains Tax rules for UK residents
Finally, the company must submit a Corporation Tax return each year, along with the company accounts, to HMRC, and the company directors are required by law to keep the accounting records for a minimum of six years under the UK tax rules.
At Finton Doyle we are specialists in helping investors all over the world manage their property portfolios effectively. If you need advice on your property company tax, get in touch today.