Are you thinking about property investment?
Are you wondering how you choose the right structure for your property investment?
Should you invest in property as an individual or through a company?
These are all common questions that our Property Accountants and Property Tax advisers are asked often. Investing in property is a big decision, and one key consideration is whether to invest as an individual or through a company.
Each structure has its own advantages and disadvantages, which can impact your tax liabilities, control over the investment, and risk exposure.
In this article we take a look at the differences to help you make an informed decision that aligns with your investment strategy.
Property investment as an individual
Investing in property as an individual is relatively straightforward. You purchase a property, manage it, and receive rental income directly. This simplicity is one of the main advantages of individual property investment. You have direct control over your investment decisions without the need for corporate formalities or additional administrative responsibilities.
However, individual property investors face personal tax liabilities. Rental income is subject to income tax, which can be significant if you’re in a higher tax bracket. For the 2024/25 tax year, the basic income tax rate in the UK is 20%, the higher rate is 40%, and the additional rate is 45% for incomes over £125,140. These rates can substantially affect your net returns from property investment.
Additionally, mortgage interest relief for individual landlords has been restricted. From April 2020, individual landlords can only claim a tax credit on mortgage interest payments at the basic rate of 20%. This change has increased the tax burden for many individual property investors.
The above is also true for individuals investing in property through a partnership or Limited Liability Partnership, as the individual will be taxed personally on their share of the taxable profits from the property, and will only receive the 20% tax relief on their share of the mortgage interest payments.
Property investment through a company
Forming a company for property investment can offer several tax advantages. Companies pay corporation tax on their profits, which is currently 25% for the 2024/25 tax year. This rate is lower than the higher and additional income tax rates individuals pay. Moreover, companies can deduct mortgage interest as a business expense, significantly reducing taxable profits.
Another benefit of investing in a company is limited liability. If the property investment faces financial difficulties, your personal assets are protected. This can be particularly important for large-scale investments or high-risk projects.
However, there are downsides to consider. Setting up and running a company involves administrative duties, such as filing annual accounts and tax returns with Companies House and HMRC. There are also costs associated with company formation and ongoing compliance.
Furthermore, while companies benefit from lower tax rates on profits, extracting money from a company can be less tax-efficient. Dividends paid to shareholders are subject to dividend tax, and directors’ salaries are subject to income tax and National Insurance contributions. For the 2024/25 tax year, the dividend tax rates are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
Property syndicates and property investment
A property syndicate is an investment structure where multiple investors pool their resources to invest in property through a company. This approach can be beneficial for spreading risk and leveraging larger investments that may be beyond the reach of individual investors.
In a syndicate, clear agreements outlining each investor’s responsibilities and profit-sharing arrangements are crucial. This clarity helps prevent disputes and ensures that all parties understand their roles and the returns they can expect.
Property investment – key considerations
When deciding between individual and company property investment, consider the following factors:
Tax implications: Understand the different tax rates and reliefs available for individual versus company structures. Use this information to calculate potential net returns.
Investment scale: Larger investments may benefit from the tax efficiencies and risk protection a company structure offers.
Risk appetite: Consider your willingness to expose personal assets to investment risks. Limited liability through a company can provide a safety net.
Long-term goals: Think about your future plans for the investment. Companies may offer better opportunities for growth and expansion.
Property investment, when to seek professional advice
Choosing the right structure for property investment depends on your specific circumstances and objectives. Individual property investment offers simplicity and direct control but comes with personal tax liabilities. In contrast, investing through a company can provide tax efficiencies and limited liability but involves more administrative responsibilities.
Carefully weigh up the pros and cons of each option and consider seeking advice from a professional accountant or business adviser.
You might find our recent post on how you fund your property investment helpful.
At RPG Crouch Chapman, or RPGCC as we are more commonly known,, we have extensive experience helping property investors make the best decisions for their property investments. We have a team of specialist property accountants and property tax experts that regularly help clients with their property investments and property investment portfolios.
Contact us today on 020 7870 9050 or email us at hello@rpgcc.co.uk to discuss your property investment plans and how we can support you in achieving your financial goals.
