Making best use of a Family Property Company

Q. I’ve heard from friends who own buy to let properties that using a limited company could save me some tax – what do you think?

A. Using a company to hold buy to let property can be attractive for a number of reasons not least because of the much lower rate of corporation tax when compared to income tax (19% vs up to 45% at the moment and, the rate of corporation tax is set to decrease to 17% from April 2020).

However, going further than this, a property investment company can be a very attractive way to provide an income to other family members and can also have significant Inheritance Tax advantages.

It’s worth remembering that the profits can be retained in the company until needed, without triggering further tax charges. This of course requires a measure of self-discipline as it’s often tempting to want to spend the money now but this can lead to exposure to high rates of personal tax.

As the rate of corporation tax is much lower than the higher rates of personal income tax, undrawn profits retained in the company can often grow more quickly compared to holding and being taxed in your own name. Many like to re-invest the profits in further buy to let properties.

When the funds are eventually required, for example, at retirement or later in life, you may find that you are a non-taxpayer or perhaps only a basic rate taxpayer. The amounts to be withdrawn can then be planned and extracted to ensure tax efficiency.

A family owned Property Company can also be a useful means of providing income to other family members, in addition to providing the building blocks for an Inheritance Tax planning structure.

For example:

You could give shares to family members. Best achieved over a number of tax years by using Capital Gains Tax annual exemptions which can also reduce estates for Inheritance Tax purposes after only 3 years (and completely after 7 years) if planned correctly.

Indeed, the recent changes to the taxation of dividends from shares (including the new tax-free dividend bands) can make it attractive to bring in adult family members as shareholders.

Family members can often be nurtured and encouraged to become involved in running the company and control (and wealth) can gradually be passed over a number of years to children or grandchildren.

As with all things tax, it does make sense to take proper advice before changing the way you do things, but the rewards and savings can be significant and worthwhile.