Should I buy residential buy-to-lets in my own name or form a company?
For most residential buy-to-let investors the answer is a resounding buy in your own name.
By buying in your own name, you are entitled to capital gains tax reliefs and allowances (CGT) that a company simply does not have.
All a company’s profits, including chargeable gains on selling investment property, are taxed via the corporation tax regime at 21% and a company does not receive any capital gains allowances.
As an individual, since April 6, 2008, you are entitled to a personal annual CGT allowance of £9,200 for 2008-09 and £9,600 for 2009-10 and the taxable gain – the amount CGT is charged on – is taxed at 18%.
The annual allowance works in the same way as your PAYE tax coding – you can have a gain up to the allowance threshold without paying any CGT, in the same way as you can earn up to your PAYE code without paying income tax.
If you are married or with a partner, you should buy in joint names as tenants-in-common.
This means the taxable gain is split pro rata your ownership, then you personal annual allowance is deducted from your portion of the gain before tax is calculated.
Tenants-in-common also gives you flexibility in adjusting the percentages of ownership, so if your property makes large rental profits, you can shift some of the higher rate tax burden to the lower rate taxpayer by increasing their percentage ownership from 50:50 to 60:40 or more.
You can see immediately that as joint owners, two people have at least £18,400 as a chargeable gain before they pay tax and then pay tax at 3% lower than a company on the rest of the gain.
Corporation tax on £18,400 is likely to be £3,780 plus the accounting costs of a company are likely to be half that of a company.
So, this simple FAQ will save you several hundred pounds a year in accounting fees and administration costs plus £3,780 at current rates if and when you come to sell each buy-to-let you jointly own.
Nevertheless, in some personal financial circumstances it may be desirable to buy in a company name, but you should take professional advice before making this step.
Answers provided for the Tax FAQs on LandlordZONE byPropertyTaxPlus.co.uk
©LandlordZONE All Rights Reserved – never rely totally on these standard answers. Before taking action or not, always do your own research and/or seek professional advice with the full facts of the case and all documents to hand.