After deciding to invest in student letting, one of the first decisions is trading status - and a question regularly asked is if owning and renting through a company is better than trading under your own name.
The answer from most tax advisers will be a non-committal ‘it depends’.
The rule of thumb is companies are good for managing tax on income in the long term.
Changing corporation tax rates also make the calculations more complicated.
However, a company will pay tax on rental profits at 20% - the same as the basic personal income tax rate for property investor.
If the property investor pays personal tax at 40% or 50%, the company pays less tax, but don’t forget drawing the income from the company could trigger a higher personal rate.
Keeping the cash in the company produces a different result.
So, for property investors who can afford to save their rental profits in a company without drawing on the cash, there’s a definite saving.
The idea is to leave the cash intact until you need to drawdown the money, and then for the company to pay dividends while the shareholders are basic rate taxpayers.
Playing the tax management game will minimise income tax for higher rate taxpayers - and if they sell a property, the company only pays tax on capital gains at 20% instead of 28%.
The determining factor is time - in the short term a company will do little to enhance tax saving for a property investor, but over 15 years or more, especially for someone over 50, the savings could be significant.
Don’t forget that companies do not profit from the annual exempt allowance in the same way as individuals for capital gains tax - and that currently, the lowest rate of personal capital gains tax is 18%.
