Corporation Tax When Selling Property Thru A Ltd Company

[Cabana]

I cant see on this forum anyone who has tackled the issue of dealing with corporation tax when selling property thru a limited company. Assuming that the limited company is a trading company (!) ie was not formed just to hold property and so cant be sold WITH the property then presumably the profit is subject to the applicable rate of tax and if the company is profitable at the time then it could be as high as 30%. It seems that this tax is overlooked when the merits of limited companies owning property are discussed.

[jbaldwin]

The point is that where a property is company owned you sell the company and not the property. This reduces tax paid on the sale.

Owning a property within a company with other activities can cause problems and is not recommended

[Irene]

When a company sells a property, any gain thereof will have to form part of the company's taxable profit and subject to the tax rate at 30% and when that profit is remitted out to the shareholders as dividends, a 10% withholding tax on the dividends shall apply. So the net effective tax rate is 37% which is also the top rate of income tax on an individual. (37% of a company is 30% corp. tax plus 10% of 70 being the net- after- tax profit).

Furthermore, the company will also be subject to a transaction tax, called specific business tax, at 3.3% of the selling price which is quite hefty when compared with the stamp duty at only 0.5%. For an individual, if the property is owned by 5 years and over, that specific business tax will not apply and that individual will suffer 0.5% stamp duty instead. For a company holding of more than 5 year, there is no exemption on that specific tax.

So, in sum, it does not make sense to have a company owning a property unless it is designed to circumvent the corporate laws such as foreign business laws or to utilise the losses of the company.

[Cabana]

When a company sells a property, any gain thereof will have to form part of the company's taxable profit and subject to the tax rate at 30% and when that profit is remitted out to the shareholders as dividends, a 10% withholding tax on the dividends shall apply. So the net effective tax rate is 37% which is also the top rate of income tax on an individual. (37% of a company is 30% corp. tax plus 10% of 70 being the net- after- tax profit).

Furthermore, the company will also be subject to a transaction tax, called specific business tax, at 3.3% of the selling price which is quite hefty when compared with the stamp duty at only 0.5%. For an individual, if the property is owned by 5 years and over, that specific business tax will not apply and that individual will suffer 0.5% stamp duty instead. For a company holding of more than 5 year, there is no exemption on that specific tax.

So, in sum, it does not make sense to have a company owning a property unless it is designed to circumvent the corporate laws such as foreign business laws or to utilise the losses of the company.

Ok thanks Irene for the advice. The property has not been owned longer than 5 years so on sale there is no additional penalty in this case. Otherwise i guess that if the capital gain is small then there is in fact very little extra tax to be paid going the company route. I had also assumed that it would be better for an actual trading company to own real estate rather than a 'shell' company created simply to circumvent property laws.

Edited September 9, 2007 by Cabana