Running a property business through a limited company has become increasingly popular, not least because the rate of corporation tax paid on profits will generally be lower than the rate of income tax paid by an unincorporated landlord and interest and finance costs are deductible in full. With the end of the favourable tax regime for furnished holiday lettings, landlords with holiday lets may be considering incorporating their business. What are the pros and cons?

Advantages

One of the main advantages is that the highest rate of corporation tax at 25% is considerably lower than the top rate of income tax at 45%. Generally, the rate of corporation tax payable on profits will be less than the income tax paid on equivalent profits made by an unincorporated landlord.

The second big advantage is that, regardless of the type of let, interest and finance costs are deductible in full; the interest rate restriction applying to residential properties let by unincorporated landlords does not apply to property companies. For holiday let landlords who will now be subject to the interest restriction, incorporation may be an attractive option to preserve the deduction for interest on loans.

Companies pay corporation tax on chargeable gains. Where the effective rate of corporation tax is less than 24%, the bill will be less than that for a landlord paying tax at the higher or additional rate, who will pay capital gains tax at 24%. The capital gains tax rules for residential properties are not mirrored for corporation tax, giving a significantly longer payment window.

A further key advantage of a company is that it has limited liability.

Disadvantages

For a landlord looking to incorporate an existing property business, it can be costly to transfer the properties into the new company. There will be stamp duty land tax to pay again. A chargeable gain may arise on the disposal of the property to the limited company (calculated by reference to market value under the connected persons rule), although under incorporation relief (which is given automatically unless disclaimed), the gain will be rolled over, reducing the base cost of the shares received in exchange.

Unlike an individual, a company does not have a personal allowance or an annual exempt amount for capital gains tax purposes, so tax is payable from the first £1 of profit or gain.

A company is a separate legal entity, so if the shareholders want to use the profits personally outside the company, they must be extracted. Depending on the extraction route chosen and the extent to which the individual’s personal allowance is available, this may trigger additional tax and National Insurance liabilities.

Running a company involves additional compliance obligations and costs, which add to the administrative burden.

Look at the whole picture In assessing whether incorporation is worthwhile, it is necessary to look at the whole picture and consider not only the tax payable by the company, but also that on profits extracted for personal use. There is no substitute to doing the sums.