Owning a property through a company can seem expensive, particularly when ATED charges apply (an annual tax payable by some companies that own UK residential property valued at more than £500,000). This may cause some clients to question why they continue to hold property through a company instead of de-enveloping and taking the property out of the company and owning it directly. There are however still advantages to holding property through a company compared to direct joint ownership, and for some property owners it may be a better option, particularly if the property is rented and the shareholder is not UK resident. Here are some of the reasons why:
A practical drawback to direct joint ownership of property in England is that legal ownership of a property is restricted to a maximum of 4 people. So, if 5 or more people or family members are involved in the ownership of a property this can create practical difficulties. Although these difficulties are not insurmountable, they do complicate matters and legal fees will start to mount up when declarations of trust showing the actual ownership of the property need to be drafted. If the property is owned by a company there are no restrictions on the number of shareholders of the company and as such a property can be jointly owned by multiple people, family members or entities.
Ownership via a company can offer flexibility for individuals who own part of a property and want to sell or transfer their share to another party, as it is far more straightforward to transfer company shares to another individual or company than it is to transfer direct interests in UK property. It is also more cost effective as transferring direct interests in UK property could give rise to a stamp duty land tax (SDLT) charge of up to 17% if there is any debt attaching to the property or any consideration is paid. SDLT does not apply to a transfer of shares regardless of whether there is debt or any consideration passes hands. A tax return must be filed within 30 days of completing the transfer of either shares or a direct interest in property and any tax due paid within that same timeframe.
Capital Gains tax is payable on a gain on either the sale of directly held property or on the sale of the shares in the property-owning company, but at different rates. In the case of a share sale the rate is 10% or 20% depending on the level of the gain and other UK taxable income and gains and in the case of a direct sale of the property the equivalent rates are 18% or 28%.
Holding property interests through a company can also be advantageous for inheritance tax purposes, as in the case of a share transfer it is the shares that are valued rather than the percentage indirect interest in the property in the underlying company, although this of course influences the value of the shares. The typical valuation method used for a private investment company would be an asset value approach, where the company value is estimated as the value of its assets less its liabilities. The amount calculated represents what would be left for shareholders if the assets of the company were sold at market value and its liabilities settled. As the liabilities would include any capital gains tax, legal costs of sale etc it is likely that the value of, for example 10% of the shares could be significantly less than an equivalent direct interest in the property itself, which would simply look at open market value with no deduction for tax or other costs.
Tax on UK rental income may also be less if the property is held by a company, as UK rental profits in a company are liable to tax at 19% (scheduled to rise to 25% from April 2023 where profits exceed £50,000. In the hands of an individual the profits would be taxed at rates of up to 45%. An individual may also face a restriction on the amount of loan interest than can be deducted from rental income, while a company would not.
Another advantage of corporate ownership is that it avoids the need for probate, which can be both costly and time consuming, in the country the property is in.
Confidentiality and security can also be compelling reasons why some clients wish to own property through a company instead of directly in their own name. High profile or wealthy individuals understandably often don’t want addresses of their properties to be publicly available.
In summary there are still a number of advantages to holding UK residential property through a company so before you de-envelope please take advice.
If you would like to find out more please get in touch with us by email enquiries@bostonmfo.com or by phone +44 1624 692930.