We receive dozens of enquiries from budding property investors each month. Usually having joined property groups online. Their first question is normally should I invest in my own name or through a limited company?
Why use a limited company?
Many newbie investors believe using a limited company will save tax.
Section 24 – the tenant tax
Since the introduction of section 24 in 2017, commonly known as the tenant tax. Property investors have been keen to move their property portfolio into a limited company. Section 24 removes a landlord’s ability to deduct mortgage interest and other finance costs, (such as mortgage arrangement fees) from their rental income. Before calculating their tax liability. For the 2020/2021 tax year and beyond, landlords will only be able to claim a tax credit of 20% based on their loan and mortgage interest.
The tenant tax mainly affects higher-rate taxpayers. Landlords’ with earnings close to the higher rate of income tax, may be pushed into the upper tax bracket. Section 24 may also mean more you are liable to higher student loan repayments. You may also attract a high-income child benefit tax charge.
What about the newbie investors?
We find newbie investors are concerned about two things. These being the present and the future. Startup investors often get into property by running a side hustle alongside their job. Additional Income from property may then move their earnings into the higher rate band. Meaning, less return on investment.
Many of the startup investors we speak to have grand plans to grow a sizeable portfolio and work full-time in their property business. With a goal to achieve annual earnings above £50k.
What are the other benefits of using a limited company?
Using a limited company tax structure legally separates the owners from the business. This structure protects the personal assets of the owners.
Limited companies currently pay 19% corporation tax on profits to HMRC. Therefore this is tax-efficient when profits are greater than £50,000. Which would attract tax at 40% if owned personally.
Limited company directors can be treated as employees. Allowing tax-deductible salary and pension payments. There are other tax-deductible costs and allowances which can be offset against profits.
Are there any benefits to investing in my own name?
For many years it was considered easier to obtain a mortgage in your own name. With less favourable rates if using a limited company. However, in recent times raising finance through a limited company could be considered equally favourable.
Rental earnings require much less financial admin if investing in your own name. Landlords’ are only required to submit a self-assessment tax return to HMRC each year. Meaning lower accountancy fees.
If investing with a partner you may be able to apportion earnings favourably to reduce tax.
You can withdraw income free of tax charges. More on this next.
Are there any negatives to investing through a limited company?
One of the rookie mistakes which we see from new investors who have set up a limited company before speaking to an accountant or tax advisor. Is being unaware of double taxation.
What is double taxation?
To move money from a limited company to your personal bank account will normally mean attracting tax charges. Limited company owners usually remunerate themselves by a combination of salary and dividends. PAYE tax is payable on employment earnings greater than £12,500. Also, class 1a national insurance will be payable on earnings above the primary threshold. Dividends are taxed at 7.5% at the basic rate and 32.5% at the higher rate.
Therefore, the company will pay corporation tax on profits and income tax may also be payable if you plan to draw profits from the company. Meaning double taxation.
Another point to consider is that dividends can only be paid from profits. It may take your company a long-time to build up rental profits to pay dividends. With large refurbishment costs going through the profit and loss account as an expense. Meaning tax losses. Property revaluation gains are also not allowable for dividends. You may need to process a higher salary to cover your living costs, which attracts tax and national insurance charges.
Greater responsibilities and higher accountancy fees
A close company is a company with 5 or fewer shareholders. These are commonly family companies whereby the shareholders (owners) are also directors (managers). Company directors’ have greater legal responsibilities. These are known as the Director’s Fiduciary Responsibilities. This means directors’ are required to comply with elements of the Companies Act 2006.
Operating a limited company tax structure means greater financial obligations. Companies are required to prepare statutory accounts each year. Plus submit a company tax return to HMRC to report on profits. This work requires the knowledge of an accountant or tax advisor. Being a financial expert.
Investing or trading?
Another point newbie investors often overlook is the tax difference between trading and investing. Investing is your standard buy to lets. Flips, sourcing, rent to rent and management income are considered as trading activities. A trading business can qualify for Business asset disposal relief, formally entrepreneur’s relief. Therefore, combining investments with trading activities may limit your ability to claim this relief when selling your business in the future.
Careful tax planning is required to determine the optimum structure for your investments. We, therefore, recommend speaking to your accountant or tax advisor at the beginning of the process. Not after you have set up a limited company or registered for self-assessment.
If your plan is to hold property for the long-term it may be beneficial to buy a property through a limited company. Especially if your goal is to earn above the basic rate of tax.
If your plan is to extract rents from the company for day to day living. You should consider how you can do this tax efficiently.
We can make a difference
If you are considering investing in property. Or feel you are not getting the best bang for your buck. Please feel free to contact us. We offer a free initial no-obligation consultation. Speaking to an accountant early in your journey can save you a lot of pain and money