When it comes to deciding the type of structure you would prefer for your property business, then, of course, you need to go through the pros and cons of each. Even if you’re thinking of remaining a sole trader.
For the purpose of this article, we’re looking at three main types of structure:
- A sole trader
- A limited company
- Limited Liability Partnership (LLB)
and we’ll also look at how tax applies to each.
- You won’t have to pay tax until you reach a threshold of £11,800. After that you’ll be charged depending on which particular band you’re in;
- Tax registration is fairly simple – you fill in a self-assessment tax form once a year, which can now be done online;
- Business expenses are tax-deductible.
- You’ll pay income tax at 20% of your profits (or 40% if you’re in the next highest band). This compares unfavourably with corporation tax, which is just 19% at the lower band and will reduce to 18% in 2020. The higher rate corporation tax payment is a flat rate of 21% (compare that to the highest rate of income tax at 45%!);
- The cutting of mortgage interest tax relief for landlords has seen many who are in the first tax band fall into the second, meaning they are due twice as much tax;
- There is no distinction between yourself as a trader and your personal property, meaning if your business goes under you could lose your house (unless you had some form of professional liability insurance).
- You can take some of your salary in the form of bonds or dividends, meaning you won’t pay tax on it;
- Tax is only 19% of your salary and will drop to 18% in 2020. This means it’s particularly efficient for companies with large profits.
- The tax-free allowance for dividends has been cut this year from £5000 to £2000;
- Dividends do not qualify for pension relief.
Limited liability partnership
- Liability for company tax and other matters is limited to how much of a share in the company each individual has (so you’re not due to settle another partner’s debts);
- It’s possible to claim tax relief on money you’ve loaned to the company or even to take out a share in it in the first place.
- Each partner still has to fill out an individual tax form on an annual basis, since each is responsible for their own tax;
- Because they are taxed individually on their share of the profits, a higher rate taxpayer will pay more than 40% tax (which would reduce to 19% if he or she filed as a limited company instead).
Even if you’ve chosen a particular company structure for your property business, it’s still important to reassess every few years. That’s because you may be earning so much more, that it would make more sense to switch over to another structure (sole trader to a limited company, for instance). As always, an accountant knowledgeable in tax for property companies would be the best person to consult.
Here at Sourced, we can certainly help point you in the right direction in this respect.