Property Blog Series: Episode 3 – Owning personally or through a company
The second blog in our property series looked at tax accounting and allowable expenses.
We now look at owning the property personally or through a corporate structure.
What is the difference between the different ownership routes?
Owning a buy to let property is straight forward for tax if you own it personally, you will pay Income Tax on the profits of that property business at your marginal rate of tax. The current Income Tax rate are 0%, 20%, 40% and 45% depending on your other income, as discussed in the first blog of the property series.
Owning the property via a corporate structure means the company suffers Corporation Tax on the rental profits. The current Corporate Tax rate is 19% and this will reduce to 17% in April 2020. You do not pay Income Tax on the profits of the rental business until you take income from the company. Income taken from a company will be salary or dividends.
Profits are kept in the company and Income Tax is only suffered when income is taken from the company, therefore it can be a good tax strategy to leave the profits in the company until you require them at a time your marginal tax rate is lower i.e. in retirement or a break in income.
Separate legal entity
A company is a separate legal entity to you, meaning that typically you aren’t personally responsible for the company’s debts. In the eyes of the law your finances and your company’s finances are distinct from each other. However, it is possible to become liable for the debts of the company if you provide personal guarantees in relation to the liabilities and debts of the company (and so personal guarantees should be entered into with caution).
What are the costs of running a limited company?
A limited company needs to be registered with Companies House and accounts filed each year. Corporation tax returns also need filed. Other running costs may include paperwork for dividends paid as well as payroll management.
A lot of running costs are tax deductible when calculating the profits of the company.
An example of tax savings
Mr Smith owns a buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.
Mr Smith also has employment income of £35,000. He is currently a basic rate taxpayer and has £15,000 of his basic rate band left to use before he pays tax at the higher rate.
The tax due on the property profit is:
|Less mortgage interest||(£250)|
The Income Tax due on the property Income is therefore:
|£15,000||@ basic rate of 20%||£3,000|
|£2,750||@ higher rate of 40%||£1,100|
|Less 75% mortgage interest basic rate credit||(£150)|
|Total Income Tax due||£3,950|
Owning via a company
Mr Smith Ltd owns the buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.
Mr Smith is the director and shareholder and does not take any profits from the company as he has his salary of £35,000.
The previous example showed the mortgage interest restricted, as discussed in the second blog of the property series. The key difference here is that the mortgage interest is fully allowable by the company and is not restricted.
The Corporation Tax is:
|Less mortgage interest||(£1,000)|
|Corporate Tax @ 19%||£3,230|
You will see that the tax saving here is £720 and this will increase further when the Corporation Tax rate reduces to 17% in 2020. The tax savings would increase if Mr Smith’s salary increased and more of his rental profits were taxed at a higher rate of Income Tax.
If Mr Smith earned £50,000 salary, the Income Tax would be £6,950 and the Corporation Tax would be £3,230 making the tax saving £3,720. As you can see, the higher your own marginal rate of tax is means higher tax savings if the company own the property and you did not take any income from the company.
Which option is best for me?
It can be advantageous for tax and legal protection if a property is held in a company. However, depending on the level of income you take from the company, as well as the admin costs incurred for running the company, it may not be beneficial for tax in your situation.
If your plan is to build up a portfolio of properties, doing so within a company may well be the most cost effective route in the long run. However if you only ever intend to have one or two properties and the rental income is not substantial, then the costs of a company could outweigh the benefits.
We recommend you take professional guidance when making a decision on ownership and MHA Tait Walker will happily assist you with this.
Need extra help?
At MHA Tait Walker we have a range of specialists in this area who can answer any queries you may have and help you make the correct decision. Please contact Ryan Keltie on 0191 285 0321 or email firstname.lastname@example.org.