A friend told me I’d pay less tax if I held my let properties through a company. Is that true?
The answer depends on whether you need to get your hands on the proceeds from your lettings business and your current highest tax rate. Let’s assume you need the cash and your highest tax rate is 40%.
If the properties are in a company, the company will probably pay tax at 20% on the rental profits. But its tax rate could be up to 27.5% if the annual profits exceed £300,000, or you control a number of companies. When you extract the profits from the company as dividends you will pay a further 25% income tax. So for rental profits of £100, you will end up with £60 in your hands.
If you hold the properties personally, and pay tax at 40%, for every £100 of rental profits you will receive £60 in your hands. No different to holding the properties in a company. However, if you had not extracted the profits from the company until a later year when you are a basic rate tax payer you would then be paying less tax. It can also be beneficial to keep the profits in the company to re-invest in further properties. The company may pay tax of 20% on the gain it makes when it sells the let properties. If you sell the properties you will probably pay tax at 28%, but you will be able to set-off a tax-free allowance of £10,600 against the gain, which is not available to the company. You may have to also pay further tax when extracting the profits out of the company.