Novice Investor - Ltd Company or Not?

[muser]

Hi,

I am planning to build up an investment portfolio in property. Over the next 3 years my plan is to acquire up to 6 btl properties in a drip fashion. I intend to be a property investor for many years to come.

Though I have done a lot of research into this, I am still unsure of whether it is better to set up a ltd company first or start as a sole trader, then convert to a ltd company later. Could someone or some of you guys please enlighten me from your experience.

I am a higher-income tax payer, married and owner-occupier. My plan is to build up an alternative source of income.

Thanks in advance.

muser

[Poppy]

'tain't no biggie.

I have not heard anyone come up with a truly convincing choice either way. I think that most landlords are private individuals (including myself) who merely own >1 property.

Put it this way, if buying through a limited company was so much more advantageous, then everyone would do it and you would not need to start this thread.

[susan 2]

Hi - I am a landlady who has been in the business for 20 years, with 15 properties. I had a long conversation with an accountant the other day about this subject. He said there was no advantage in becoming a business. I have always been happy being a sole trader,and do not think its worth the hassle of anything else. If anyone has a convincing argument for the business route I'd be pleased to hear it. Susan

[Grange]

The main beniefit I can see for having a company is that you will be taxed on profits at 19% not 40%. This means you will have more money to reinvest in the business. If you take the money out through dividends, this advantage pretty much disappears.

However, I doubt, somehow, that you are expecting much profit from the letting side of your business, so there won't be much tax to pay anyway.

For the sake of avoiding having to file accounts, tax returns etc. for your company, I wouldn't bother incorporating. Save only if you are worried about being sued by a tenant - but this is not a tax issue.

[Tax Accountant]

Like everything in life, there are two sides to the coin. Each person's circumstances dictates whether he/she is better off with a company or hold the properties in personal names.

I will list below some of the main points and hopefully these would be of assistance to you as well other readers.

You may be better off owning the properties through a limited company if:

(1) You do not need to draw any income from your property lettings, and
(2) You do not intend to sell the properties in the foreseeable future, and
(3) You are a higher rate taxpayer.

The company will benefit from tax rate of between 10% and 19% on profits upto £50,000. Thereafter tax will be at 19% on profits and gains of £250,000.

If you are a basic rate taxpater, you would be best advised to hold the properties in your personal name(s). This is because the tax on company income (19%) is nearly the same as basic rate personal tax at 22%. For the little difference in tax rates, it is not worth the extra paperwork in running a limited company.

If you plan to sell the properties at a gain in the near future, personal route is better because you get various reliefs and allowances, eg, PPR relief, lettings relief, taper relief and annual exemptions. The company does not get any of the above mentioned reliefs etc. Therefore, in most cases, these allowances, reliefs and exemptions will result in no tax or lower personal tax than the tax which a company would have suffered.

I hope these pointers are helpful in deciding what suits you better.

Ramnik

[johnj]

There is no single simple answer, hence your problem.
You need to sit down with a good advisor for him to help you formulate your plans, and for him to explain where the pitfalls and oppurtunities lie.
there are more alternatives than you have identified in your note.
Hi,

I am planning to build up an investment portfolio in property. Over the next 3 years my plan is to acquire up to 6 btl properties in a drip fashion. I intend to be a property investor for many years to come.

Though I have done a lot of research into this, I am still unsure of whether it is better to set up a ltd company first or start as a sole trader, then convert to a ltd company later. Could someone or some of you guys please enlighten me from your experience.

I am a higher-income tax payer, married and owner-occupier. My plan is to build up an alternative source of income.

Thanks in advance.

muser

[Tax Accountant]

Can I refer the querist to my earlier reply. So what are your personal circumstances in relation to the pointers set out in my reply?

Ramnik

[johnj]

Given the ability to transfer properties into a company, recover tax free ones equity, and have the company able to receive future income at 19% or sell at zero capital gains tax there is often a case for starting as an LLP or individual and later incorporating. Hybrid arrangements can be even more useful in larger cases.

[muser]

Like everything in life, there are two sides to the coin. Each person's circumstances dictates whether he/she is better off with a company or hold the properties in personal names.

I will list below some of the main points and hopefully these would be of assistance to you as well other readers.

You may be better off owning the properties through a limited company if:

(1) You do not need to draw any income from your property lettings, and
(2) You do not intend to sell the properties in the foreseeable future, and
(3) You are a higher rate taxpayer.

The company will benefit from tax rate of between 10% and 19% on profits upto £50,000. Thereafter tax will be at 19% on profits and gains of £250,000.

If you are a basic rate taxpater, you would be best advised to hold the properties in your personal name(s). This is because the tax on company income (19%) is nearly the same as basic rate personal tax at 22%. For the little difference in tax rates, it is not worth the extra paperwork in running a limited company.

If you plan to sell the properties at a gain in the near future, personal route is better because you get various reliefs and allowances, eg, PPR relief, lettings relief, taper relief and annual exemptions. The company does not get any of the above mentioned reliefs etc. Therefore, in most cases, these allowances, reliefs and exemptions will result in no tax or lower personal tax than the tax which a company would have suffered.

I hope these pointers are helpful in deciding what suits you better.

Ramnik

Thanks to you all for the replies. In response to these comments -

My immediate intention is to build an alternative source of income, so the only money (if any at all) that I would want to draw out of the investment would be expenses-related. This approach is likely to remain in place for the next 5 years.

Unless something unforeseen happens, I do not plan to sell for the next 5 years at the earliest.

Prior to sending out the original query post, my guy intention was to start of as a lone trader with the plan to review the situation with professional advice after the mentioned 5 years.

Thanks

[Tax Accountant]

I agree that you should buy it as a personal property.

ramnik