Pondering about owning a rental property? Are you finding it hard to choose between owning it as a sole trader or as a limited company? No doubt it can be a difficult decision to make. We are here to make it a bit less difficult for you. Here is everything you need to know about all the implications of owning a rental property whether as a sole trader or a limited company
Whether you are thinking of venturing into the real estate investment or you are already there, you will need to consider several factors before making a decision. We are offering you all the information you need regarding ownership of rental property both as a sole trader and as a limited company. Explore the pros and cons of both choices. From tax efficiency to administrative hassle learn all the pertinent facts through our blog.
Outline
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What does it mean to own a rental property?
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How owning a rental property as a limited company is different from owning it as a sole trader?
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Between a sole trader and a limited company who faces more liability?
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What are the administrative differences of owning a rental property as a sole trader VS as a limited company?
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What are the legal implications regarding owning a rental property as a sole trader and as a limited company?
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What are the Tax implications of owning a rental property as a sole trader?
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What are the Tax implications of owning a rental property as a limited company?
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Is owning a rental property as a limited company more Tax Efficient than as a sole trader?
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Can I transfer property ownership in and out of the company?
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How an accountant can help manage my rental property as a sole trader?
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How can an accountant help a limited company in managing rental property?
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Conclusion
1. What does it mean to own a rental property?
In the world of real estate investment, owning a rental property is one of the best options. To own a rental property means that you have :
- Passive Income
- Steady monthly earnings
- An asset
- A nest egg for retirement.
So, if you are considering stepping into the field of investment then owning a rental property is a wise consideration. Now the next logical question would be, whether you should own the property as a sole trader or as a limited company? This is a big question and deserves deep thinking and deliberations. Let us help you find answers to your questions by discussing in detail what each option entails with regards to benefits, tax efficiency and possible challenges.
2. How owning a rental property as a limited company is different from owning it as a sole trader?
There is a significant difference between owning a rental property as a sole trader and owning it as a limited company. The major differences are in the following areas;
- Liability
- Administration
- Legal Responsibility
- Taxation
3. Between a sole trader and a limited company who faces more liability?
A sole trader has to face more personal liability than a limited company. As a sole trader you will be liable to business obligations debts and your personal assets will be at risk if you encounter any business losses.
On the other hand, since there are shareholders in a limited company so liability is also shared. This protects your personal assets and you have only limited liability.
4. What are the administrative differences of owning a rental property as a sole trader VS as a limited company?
As sole trader: Administration as a sole trader is comparatively simple. You have to file sel-assessment tax returns and keep an accurate record.
As a limited company: Running a limited company holds more administrative complexities. Filing annual accounts, maintaining company records , appointing directors and a lot more is involved regarding the administration of a limited company
5. What are the legal implications regarding owning a rental property as a sole trader and as a limited company?
As sole trader: Legally there is no separation between you and the business if you are operating as a sole trader. You are responsible for the profits, loss and everything else.
As a limited company: In the legal sense, a limited company is separate from its individual shareholders in the sense that it is a separate entity. If you own rental property through a limited company than the owner is in fact the limited company and not you as an individual
6. What are the Tax implications of owning a rental property as a sole trader?
If you own rental property as a sole trader then you must understand all the tax implications involved in this area. Some of the key tax implications are:
- Income Tax: you definitely have to pay income tax if you own a rental property as a sole trader. Since rental income is regarded as your personal income in UK tax laws, income tax is applied on it. You are required to report the income you receive through your rental property on the self-assessment tax return.
- Capital Gains Tax: You have to pay Capital Gains Tax if you sell your property and get a profit out of it.
- Inheritance tax: Inheritance may be applied if your rental property is considered as a part of your inheritance estate.
- Capital Allowances: You can claim capital allowance on appliances, heating, and certain other fixtures in your property.
- Replacement of Domestic Items Relief: You can claim tax deductions if you need to replace certain things in your property like furniture or equipment.
- Stamp Duty Land Tax: On buying a property you may have to pay Stamp Duty Land Tax.
7. What are the Tax implications of owning a rental property as a limited company?
Owning a rental property as a limited company has different tax implications than as a sole trader. The key tax considerations in this case are:
Corporation Tax: Income from the rental is treated as a profit for a limited company. Since limited companies have to pay corporation tax on the profits they make, they will also have to pay corporation tax on the rental income.
Inheritance Tax: According to government of UK “any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes.”
Stamp Duty Land Tax: If you buy a piece of land as a limited company then you may be required to pay stamp duty tax on the price you paid.
Capital Allowance: Like a sole trader limited company can also claim capital allowance on certain fixtures and equipment
Mortgage Interest as an allowable expense: limited companies can also claim mortgage interest relief as an allowable expense.
Other allowable expenses: Expenses like repair and maintenance, insurance, property management fees can be claimed for tax deductions by a limited company.
8. Is owning a rental property as a limited company more Tax Efficient than as a Sole trader?
Yes it is, here is how.
Flexible tax planning: Limited companies have more room for flexibility when it comes to tax planning. They can reduce the tax by choosing to reinvest the profits or paying themselves salaries or even receiving dividends.
Full Mortgage Deduction: Limited companies can enjoy significant tax relief by claiming full mortgage interest deductions as an allowable expense. Whereas a sole trader, you may face restrictions in this area.
Lower Corporation tax rate: companies pay corporation tax on their rental profit and in UK corporation tax rates are generally lower than the top income tax rates for individuals.
Inheritance tax planning: Owning a rental property as a limited company gives you more room to have efficient inheritance tax planning.
9. Can I transfer property ownership in and out of the company?
Yes, it is possible to transfer the property ownership in and out of the company but it is crucial to comply with the specific rules and regulations set by the government of UK. There are several point to consider while transferring your property from stamp duty tax to legal documentation.
10. How an accountant can help manage my rental property as a sole trader?
An accountant’s help is crucial for a smooth and efficient management of rental property.
Tax planning: An accountant will help you plan strategies to save tax
Book keeping: A professional can keep accurate and organized records for you.
Tax returns: An accountant will save you the headache of filing your self-assessment tax returns on time
Maximize allowable deductions: an accountant will be able to help you maximize allowable deductions in mortgage interest relief and other allowable expenses.
Expert financial advice and analysis: Hiring an accountant will give you access to expert financial advice. Your accountant can provide you a professional financial analysis of your business.
11. How can an accountant help a limited company manage rental property?
An accountant can be of immense help to a limited company in managing rental property efficiently.
Forming a limited company: An accountant can help you from the first step of setting up a limited company. Your accountant will help you follow all the rules and regulations if you want to own a rental property through a limited company.
Tax efficient strategies: your accountant will help you adopt tax efficient strategies. From long term strategies for minimizing inheritance tax to optimizing deductions of allowable expenses, your accountant will provide you a skilled and professional guidance in making your financial situation better.
Dividends distribution: your accountant will help you in distributing the dividends at the right time.
Support in Audit: your accountant will be of immense support to you during audits and help you navigate the process competently.
Conclusion
Owning a rental property is a sound business decision. The choice between owning it as a sole trader or as a limited company is a point that needs deliberate thinking and deep considerations. Both have their own pros and cons and you have to choose what is best for your particular financial situation and your specific personal goals. We are here to help you find answers best suited to you as an individual or as a company.
I am operating a small property portfolio as an idividual and paying normay 20-40 % tax
I need to know forming a limited co will save tax liability if so what % ?
Hi Tony, thanks for your query. There are some general advantages of operating as a limited company like withdrawing tax optimised salary and dividend and a bit lower tax rate. However, recently, corporation tax rate has been increased upto 25% but this rate starts applying in full if your company makes above £250k. Specifically, companies can claim relief on interest on mortgage to finance their portfolio in full while individuals get only 20% basic rate relief. An other advantage is the capital gain tax saving if you own the property through your property company. Companies do not pay capital gain tax like individuals landlords do in case of sale of residential properties. The exact savings will depend on your income level and overall position. Please contact for no obligation fee consultation.