Is it worth buying flats to let through a company?

Question

José Manuel Alburquerque · Accepted Answer

It depends on how many flats you have and whether you need to live off the rent, so it is worth doing the sums before deciding. A company that lets a few flats without employees is usually an asset-holding company (“sociedad patrimonial”) and pays 25 % corporation tax (the “Impuesto sobre Sociedades”) on its profit. As an individual, you are taxed under the “IRPF”, Spain's personal income tax, at rates that rise with income, but you can apply allowances for letting homes that the company does not have. In addition, when you take money out of the company you will be taxed again on the dividends in your income tax. That is why, with one or a few flats and if you live off the rent, it usually works out better to hold them in your own name, whereas a company may be worthwhile with several flats and profits that are reinvested. What the company pays and what you pay The company pays corporation tax on its profit, which is the rent it receives less expenses and depreciation, the wear and tear on the flat that the law allows to be deducted each year. The general rate is 25 %. Small businesses have lower rates, but not asset-holding companies, which always pay 25 %. A letting company is an asset-holding company if more than half of its assets are not used in a business activity. Letting only counts as a business activity if the company has at least one full-time employee to manage it. If the flats are in your name, the rental profit is added to your other income for IRPF purposes, at rates that rise the more you earn. On the other hand, residential letting has allowances on that profit under the IRPF that the company cannot apply. To have the use of the company's money, you will have to distribute it as a dividend, which is taxed again in your income tax. That is why a company is mainly worthwhile when the profits stay in it to buy more flats or pay off loans. The same happens when the flats are sold. The company is taxed on the capital gain and you are taxed again when it is distributed. If the flats are yours, the gain is taxed only once in your income tax. Other differences If the landlord is a company, the tenant can extend a residential tenancy for up to seven years instead of five. In Catalonia, companies also pay the Catalan tax on empty homes (the “impost sobre els habitatges buits”) if they have flats left unoccupied without good reason. If you or a relative use one of the company's flats, the tax authorities will value that use at market price, as if the flat were let to a third party. The company has fixed costs that you do not, such as those of setting it up, keeping the books, filing the annual accounts at the Companies Registry (“Registro Mercantil”) and submitting its tax returns. The tax on the purchase follows the same rules whether you or the company buys. In both cases, anyone who is already a large-scale landlord (“gran tenedor”), for example because they own five or more homes in municipalities declared a stressed residential market area (“zona tensionada”), pays 20 %. How to decide With one or a few flats, if you need the rent to live on, it normally works out better to hold them in your own name. A company may be worthwhile with several flats, profits that are reinvested and, if the volume justifies it, an employee who genuinely manages the lettings. Before setting one up, ask a tax adviser for a calculation using your own figures over several years. Outside Catalonia corporation tax is the same, except in the Basque Country and Navarre, but the IRPF bands and the tax on the purchase change.