If you run a property business you have 2 options to consider: you can either run as a sole trader or you can incorporate your property business. It depends on what tax band you fall into, how much cash you have and how much cash you want to keep in a certain period. Let have a look
The tax rates that apply to each structure
You will either be paying corporation tax or the income tax on the profits that you make when you rent your property. This depends on your company structure.
The corporation tax rate is currently 19% . While you pay income tax of 20% on income above your personal allowance which is £12 570 ( the basic rate band) , 40% if you are a higher rate taxpayer ( earning an income of £50 271 to £50 000) and if you are earning over £150 000 you will be paying tax at 45%.
Allowances
The point to note here is that although the corporation tax rate is lower than the personal tax rates, when you are a limited company you will be paying taxes on any income that you have unlike in the personal taxes where you don't pay any taxes on income up to £12 570.
You will also get a property allowance if £1000 of you are self-employed and if you have an annual income of £1000 or less you will not be paying any taxes on it.
Tax when you sell your buy to let property
You will pay taxes when you make a profit on the sale of your property whether you are running your property business as a company or you are self employed but there is a difference in the way you will pay your taxes under each structure.
If you are self employed you will be paying CGT on the sale of your buy to let.
CGT is a tax which is payable on the sale of any asset which has increased in value since you bought it. For UK residential property the CGT is payable at 18% and 28% depending on which tax band you fall into. This rate is applied to the gain that you make and not the sale price.
A CGT allowance of £ 12 300 is available for the individuals ( self-employed) and therefore no capital gains tax liability will arise if a gain is made or total gains made in a year are less than £12 300 in a year.
If you have incorporated your property business you won't have to pay CGT on it instead you will pay corporation tax on the gain. The corporation tax is 19% for the tax year 2022-2023
The deadlines to pay taxes
The deadlines to pay taxes are different in each business structure.
If you are self employed and running the property business as a sole trader you will have to submit your self assessment tax return and pay any income tax due by 31 jan in the following tax year
If you have sold any property you will have to report and pay capital gains tax on any gains within 60 days.
You must pay your corporation tax 9 months and 1 day after the end of your accounting period. The corporation tax is paid on all your profits including the profits made when you sold the property.
The deadlines to pay taxes is an important point to consider since you need to forecast when you will be needing cash to pay taxes.
Although different allowances are available if you are self employed, you might want to incorporate your business if you are a higher rate taxpayer but again it all depends on your individual situation. It's always a good idea to talk to an accountant about which company structure suits you best. If you are looking for an accountant in Croydon, an accountant in London contact Taxaccolega and our property accountants in Croydon will be happy to help you.