Limited company could cut tax bill

ME writes: I own a property, which I have been letting for several years. I am now planning to redevelop the site and build new apartments. I will then sell the individual flats and may keep one for myself. My thoughts have turned to how the project should be structured and the rate of tax that I will pay on any profits. Is there any difference if I carry out the development in a limited company rather than in my own name?

Answer

The Inland Revenue would treat the profits arising from the property development as trading profits rather than investment gains, writes Chris Lane, a partner in Kingston Smith.

If you carried out the redevelopment through a limited company, the profits would be taxable at the company’s marginal tax rate. At present this is 19% for profits between £50,000 and £300,000. Profits above this level are taxed at a marginal rate of 32.75% until £1.5m when the rate is 30%. This assumes that you do not have any associated companies.

These rates compare to a personal income-tax rate of 40%, when the trading profits exceed approximately £35,000 if you had no other earnings, and a national insurance charge of 1%.

Clearly, the corporate tax rate is lower, but what you need to remember is that the net profits are still not in your hands.

If you were to liquidate the company after you had sold all the properties, and the project had taken more than two years to complete, then with the benefits of full business-asset taper relief (BATR), the capital-gains tax (CGT) on liquidating the company would be 10%.

Without any BATR, the CGT rate could be as high as 40%. At this level the benefit of the low corporate rates are lost.

Another option to consider is using a limited-liability partnership as the development vehicle for the project.

This combines the protection of limited- liability status with the normal income-tax rules for partnerships and individuals. Under a partnership, profits are taxed as if they are your own, and there is no second charge when you wish to withdraw the funds.