Should You Use A Property Management Company To Let Out Your Properties?

Jennifer Adams considers whether landlords should set up a company to carry on a property management trade.

In the last edition of Property Tax Insider, Sarah Bradford investigated the tax benefits or otherwise of a company owning property, rather than being owned by an individual (‘Should you hold your properties within a company structure’). This article continues with the company theme by considering a further option – still using a company to reduce the tax bill, but with the property ownership remaining with the individual. The method is via the use of a property management company.

As previous articles have discussed, where properties are owned personally, rental income is taxed at the taxpayers’ marginal rate. In comparison with ownership via a company, individual ownership is more tax-efficient should the owner have no other income. The personal allowance is offset in full from the profit made with any balance taxed at the basic rate.

Where the situation becomes complicated and needs further consideration is when the owner has other income, such that the marginal tax rate is at the higher or additional rates. If the let property is held within a company the rate on profits earned can be a flat 20% corporation tax, but there is the possibility of a further charge levied when any money is withdrawn in the form of salary or dividends. The most tax efficient scenario, at least in the short term, is for the property to be held within a company, being taxed at 20% but with no distribution being made of the retained profits. 

Further consideration is needed on the sale of the property. Should the annual capital gains tax (CGT) exemption remain available and the owner is a basic rate taxpayer, there is the benefit of the annual allowance if held personally. The tax charge on any taxable gain is 18% for the individual, or 20% on a gain if the property is sold by the company. However, companies may have the advantage that indexation allowance is deductible from any gain. 

For a higher rate or additional rate taxpayer wishing to retain ownership (or being required to do so due to a mortgage provider’s restrictions), the setting up of a management company means that at least some of the rental profit is taxed at beneficial company tax rates.  

A company is set up to provide the usual letting agent services, namely ongoing maintenance, repairs and property inspections and then charges the individual (as the property owner), a rate for the service. The director shareholder of the company will be the same person who actually owns the properties. The management charge is paid to the company from the rental income received by the property owner, and as such is deductible from the rental income received by the individual property owner. 

Commercial letting agents usually charge around 15% of the gross rental income for a full management service, and this percentage should be used as a basis for the charge levied by the company. An additional charge could be made for the drawing up of a tenancy agreement or the taking of an inventory. Any legal fees relating to the tenancy are payable by the management company and are tax deductible against the management income received. 

A higher rate taxpayer can thus save tax at 40% of the total management charge. Of course, the charge remains as company income, taxed at the lower corporation tax rate of 20%. The profit made post tax may be withdrawn from the company as dividends at a later date, perhaps when the shareholder is no longer a higher rate taxpayer. The scenario works well if you are a higher rate or additional rate taxpayer because of the difference in tax rates. 

A management company can achieve a tax benefit via the purchase of assets (capital allowances on the purchase of plant and machinery) for use in the company’s business. The work of the management company is to service the properties owned by the landlord - as such, it is a trading business. The income is the management charge and the expenses are those incurred in running the portfolio of properties. ‘Plant and machinery’ in this context includes office equipment. For example, a chair will be needed by someone working in the management company business in order to facilitate the running of the business; therefore tax relief is available at 100% of the cost. 

A larger asset, for example, a van purchased in the name of the company, can also produce 100% tax relief under the capital allowances rules, as the workers in the business (i.e. the directors) will need to use a van to drive to the properties for their work in managing. However, a van or car used for private as well as business use will attract a personal benefit-in-kind charge. 

The use of a management company is beneficial where: