Filing a Tax Return and Choosing Between Personal and Company Ownership
Property tax is an essential aspect of owning real estate, whether you hold it personally or through a company. Navigating tax obligations can seem complex, but with a clear understanding, it becomes manageable. In this blog, we’ll break down what property tax is, how to file a tax return, the differences between owning property in your personal name versus a company, and the pros and cons of both. We’ll also discuss allowable expenses to help reduce your tax liability.
What is Property Tax?
Property tax refers to the taxes levied on real estate by the government. This includes:
- Stamp Duty Land Tax (SDLT)– Paid when purchasing a property in the UK.
- Capital Gains Tax (CGT)– Paid on the profit when you sell a property that’s not your main home.
- Income Tax– Paid on rental income if you own a rental property.
- Corporation Tax– Paid on rental income and capital gains if the property is held by a company.
How to File a Property Tax Return
Filing a property tax return in the UK depends on how you own the property:
- Personal Ownership (Self-Assessment Tax Return):
- If you receive rental income, you must declare this through a Self-Assessment Tax Return.
- Register for Self-Assessment with HMRC if you haven’t already.
- Declare your income and expenses (allowable deductions) on the property section of the tax return (SA105 form).
- You’ll pay Income Tax on your rental profits and Capital Gains Tax if you sell the property for a profit.
- Company Ownership (Corporation Tax Return):
- If you hold the property through a company, rental income is subject to Corporation Tax.
- Complete and file a Corporation Tax Return using HMRC’s CT600 form.
- Include rental income, allowable expenses, and capital gains (if applicable) in your tax return.
Personal vs Company Ownership: Pros and Cons
Owning Property in Your Personal Name
Pros:
- Simplicity: Managing the property in your personal name is straightforward. You don’t need to worry about the additional complexities of running a company.
- Capital Gains Tax Exemption: If it’s your main home (Principal Private Residence), you are exempt from paying CGT on any gain when you sell.
- Lower Threshold for Tax-Free Income: You can receive up to £1,000 in rental income without paying tax (Property Income Allowance).
Cons:
- Income Tax Rates: You’ll be taxed at personal Income Tax rates (20%, 40%, or 45%), which can be high if you have other income.
- Capital Gains Tax: If you sell a rental property, you’ll face CGT, with rates at 18% or 28% depending on your income level.
- Mortgage Interest Relief Restrictions: Personal ownership no longer allows you to deduct full mortgage interest from your rental income, making it less tax-efficient for highly leveraged properties.
Owning Property in a Company Name
Pros:
- Corporation Tax Rates: Rental profits are subject to Corporation Tax, which is generally lower than personal Income Tax rates.
- Mortgage Interest: Companies can deduct the full amount of mortgage interest as an expense, making it more tax-efficient.
- Tax Efficiency for Multiple Properties: If you own several properties or plan to reinvest profits, it might be more beneficial to hold them in a company due to lower tax rates.
Cons:
- Double Taxation: You’ll face double taxation if you want to withdraw profits personally – first Corporation Tax and then Dividend Tax.
- Set-Up and Running Costs: There are additional costs associated with setting up and running a company, such as accountancy fees and company administration.
- CGT on Shares: Selling the company’s shares may incur CGT, and transferring personal property to a company triggers SDLT and CGT.
Allowable Expenses for Property Tax
Whether you own property personally or through a company, certain expenses can be deducted from your rental income to reduce your taxable profit. Allowable expenses include:
- Mortgage Interest (only fully deductible for companies)
- Property Maintenance and Repairs– Necessary repairs to keep the property in good condition (not improvements).
- Management and Letting Agent Fees
- Legal and Professional Fees– Costs of hiring a lawyer, accountant, or letting agent (excluding fees related to buying the property).
- Utility Bills and Council Tax (if paid by the landlord)
- Ground Rent and Service Charges– For leasehold properties.
- Insurance– Landlord insurance and buildings insurance.
Whether you hold property in your personal name or through a company depends on your financial goals and tax planning strategy. Personal ownership offers simplicity, while company ownership provides tax advantages for larger property portfolios. It’s crucial to consider the long-term impact of each route, and seeking professional advice can help tailor your approach to property tax.
By understanding the differences and making informed decisions, you can optimize your property investments and reduce tax liabilities.
For more information on how we can help you and your business with your taxation needs or to appoint us as your accountant, please call 02035531059 / 07950585521 or email info@citygateaccountants.co.uk