For property investors, one of the most common questions asked is whether to invest as an individual or as a limited company. Buy-to-let (BTL) investing has changed dramatically in recent years thanks to regulatory, legal and tax changes. Many landlords have reacted to these changes by changing to limited company ownership. In this compact guide we look at how to make sure you’re investing in the most tax efficient way possible.
Tax savings on rental income
If you’re using a company for BTL investment, there are attractive tax benefits. In the UK companies pay corporation tax, which is currently set at 19% and set to fall to 17% in April 2020. This rate is fixed no matter how much profit you make. By comparison, if investing as an individual tax rates of up to 45% are chargeable on income, depending on which levels of tax you are required to pay.
Another major benefit for limited companies is that they are exempt from mortgage interest relief restriction, which was introduced in April 2017 for individuals. It’s being phased in over four years and by April 2020 the amount of tax relief available to BTL investors will be dramatically reduced. If you’re investing through a company, you won’t be affected by this change.
Taking money out of a company
Money can be taken out of a company as a dividend and from April 2018 for the recipient shareholder the first £2,000 is tax free. Anything over this amount is charged at 7.5% for a basic-rate taxpayer, 32.5% for higher tax rate individuals and 38.1% for people in the additional tax rate bracket. This is on top of the corporation tax that has already been paid by the company. When you combine both tax bills, it pushes the overall rate of tax to over 50% in some cases, compared to either 18% or 28% Capital Gains Tax if owned as an individual.
The money can also be paid out as a salary, but this typically works out as a more expensive way to extract money because National Insurance contributions would also need to be paid. A landlord avoid paying tax if they can afford to leave their rental income (or proceeds from a sale of property) within a company. However, if the landlord needs to pay out the company’s profits to fund personal expenses, this reduces the tax benefit. So, where a landlord doesn’t need to take money out of a property, it can be preferable to use a company. Where the landlord does need to extract funds, company ownership can lead to higher overall rates of tax. When deciding which tax option is best for you, you need to look at the tax applied when taking money out of a company compared to the impact of the interest restrictions on individual landlords.
What happens when you come to sell?
Corporation tax is paid when a company sells a property. This is currently 19% (falling to 17% in 2020). This is less than the capital gains tax paid by individuals, which is 28% for a taxpayer whose income and gains exceed the basic rate threshold. However, if the money is taken out of a company the shareholder must pay income tax on top of corporation tax. Therefore, if a landlord is planning to hold property for the long term, or following sale of a property is happy to reinvest from the company, a company can be a tax efficient way to hold the investment property. But if a landlord wants to extract proceeds from the sale of a property to fund his own expenses, the overall tax bill is likely to be more than had he held the property directly.
Can I use an offshore company?
Previously there were significant benefits for non-UK resident investors in using a non-UK company. However these benefits are being eroded by changes in tax law. A non-UK resident individual or company buying UK property from April 2019 will pay tax on income and gains from the property in much the same way as his UK counterpart. For UK residents, the problem with using a non-UK company is that the company needs to be centrally managed and controlled abroad in order to avoid the UK tax laws. This means board meetings and major decisions about the company need to be made from outside of the UK (which can be impractical for small BTL landlords).
Stamp Duty Land Tax
A company is always subject to the higher rates of SDLT when buying a property however there may be ways to legitimately reduce the amount you need to pay.
How to set up a limited company
If you are setting up a company to buy new properties, this is quite straightforward. However, if you have an existing portfolio of property which you want to transfer to a company, on transfer there can be significant Capital Gains Tax and Stamp Duty Land Tax charges. There are ways to avoid or mitigate these, but they are complex and do not work for every scenario.
BTL as an investment
BTL is still a popular investment vehicle, especially when compared to the interest rates on offer from traditional savings accounts. Mortgage rates have also hit new lows, adding to the attractiveness of this investment.
That said, it is important to remember that there can be advantages and disadvantages to owning property through a company or in your own name, depending on your circumstances.
We would advise you to ask your IFA or a qualified accountant for the best way forward.