Investing in property has mostly been seen as a safe and profitable investment, both in the short and long term, so should I buy a property through a limited company? Whether you choose to buy property to renovate and then sell on for a profit, or you buy to receive rental income and watch the value of the property increase over the years. Both will have an impact on the decision you make when it comes to deciding whether to buy through a limited company or not. You should get clear on your objectives and goals before committing to an ownership structure as it can be costly to change your mind.
Changes for 2020/21
Unfortunately, over the past few years, changes have been introduced, which have made it less tax-efficient to own property and rent them out as an individual.
These changes were phased in in 2017/18 and for the 2020/21 tax year are fully in place. This means that when calculating your rental profits (income less costs) you can no longer deduct mortgage interest costs from your taxable profits.
Instead, your rental income will be added to all other income and then a basic rate allowance can be claimed.
So, let’s look at an example.
| Before Changes | After April 2020 | |
| £12,000 per year – rental income | £12,000 | £12,000 |
| £6,000 – mortgage interest costs | -£6,000 | -£0 |
| £1,000 – other costs | -£1,000 | -£1,000 |
| Profit | £5,000 | £11,000 |
| Basic rate taxpayer would pay: | £1,000 | £2,200 less £1,200 allowance (20% of £6,000 interest) = £1,000 |
| Higher rate taxpayer would pay: | £2,000 | £4,400 less £1,200 allowance = £3,200 |
As you can see, the tax liability for the basic rate taxpayer once the allowance has been applied is actually the same as it would have been before the changes came in. The higher rate taxpayer will pay more under the new system.
The basic rate taxpayer could still be affected, however, as you can see above, without the deduction of interest the taxable profit is much higher. This may be cause for concern for people hovering around the higher rate tax threshold, it could be that they are pulled over as a result of their increased ‘profits’.,
Because of these changes, the transfer of properties to a limited company has become more and more popular. There are a few financial reasons why you might want to hold property in a company, let’s look at these…
*Taxation on profits.
If you own a property as an individual, the income you receive from rent will be taxed as income tax, along with your other earnings (currently 20% basic rate and 40% higher rate).
As a company, the profit you make will be liable to Corporation Tax instead, (currently 19% on company profits) this could make a huge difference to the amount of tax you pay if you are a higher rate taxpayer. Rental profits can be taken as salary or dividends, there are ways you can take your dividends to maximise tax efficiency, or you can leave them within the company to use on your next investment.
*Tax treatment of mortgage interest.
As we looked at earlier, if you are a higher rate taxpayer and have mortgages, your tax liability will be less if you hold properties in a company, because you can deduct your full mortgage interest costs.
*Mitigating Inheritance Tax.
If you are planning to give the property to your children when you die, there are ways to make Inheritance tax savings, children can become shareholders of your limited company. When the property is sold the proceeds are distributed between the shareholders. This is still taxable, but not at the same level as inheritance tax.
But it can be a difficult process and there are a few things to consider.
*The transfer of properties to a limited company would be treated as a sale and would therefore be liable to Capital Gains Tax and stamp duty. This can make the switch an expensive one, usually it is advised to buy any future properties through a company and retain existing properties in personal ownership.
*Mortgages for companies are limited and tend to be more expensive, your own finances will be scrutinised, and mortgage lenders will often want a personal guarantee from the director.
*Another thing to bear in mind is that accountancy costs associated with filing annual company accounts will be higher and there will be more paperwork to keep on top of.
*Potential for the same profits to be taxed twice, corporation tax when a property is sold and then personal income tax on the extraction of funds from the company. This can be mitigated and managed to get the best tax outcome and it can still be more tax efficient to own rental property through a company. This will depend on individual circumstances, how much money is needed to be extracted and when and whether or not any of the profit is reinvested into other company owned assets.
*Potential to create an annual tax charge for the company, Annual Tax on Enveloped Dwellings (ATED). If a residential property owned by a company is valued at more than £500,000 then this could give rise to an ATED liability and also a requirement to complete an ATED return for each year that the property is owned by the company. There are some reliefs that can be claimed and not all property falls within the scope (for example hotels and guest houses are exempt). It is worth keeping this in mind if you are considering purchasing residential property worth more than £500,000.
So, you’ve read all the facts, but how do you decide whether to use a limited company or not?
It’s a question we get asked a lot and there is no right or wrong answer, it just comes down to each individual, there will be pros and cons to each side and compromise will be inevitable. Come and speak to us, we want to help you find out what will work best for you.