Since the changes in the treatment of buy-to-let interest, it’s becoming more popular to purchase residential property via a limited company. But it’s not the best option for everyone.
What are the Pros of buying a residential property through my limited company?
From April 2020, mortgage interest will no longer be an allowable expense for individual property investors, but it’s allowable for companies, so there is a potential tax saving here.
Property held within a company gives greater tax planning options for personal taxes, inheritance tax and share distributions that you don’t have access to as an individual holding property.
Profits made within the company can be drawn as dividends. The most tax efficient way is to declare dividends up to the personal higher rate tax band. Further profits can be kept in the company for future investment or additional dividends in years to come.
What’s the most tax efficient way to extract money?
Let’s say the rental company has made £80,000 profit and has a director with no other income. The corporation tax due on this is £15,200 leaving £64,800 retained profits.
On the director’s personal tax return, we would declare a dividend of £45,000. After deducting the personal allowance of £11,500 and the £5,000 tax free allowance the remaining £28,500 would be taxed at 7.5% resulting in a personal tax bill of £2,138.
If the director had declared £80,000 as personal income on a personal tax return the tax bill would be £20,700.
Adding the corporation tax and personal tax bills together, there is still an overall tax saving of £3,362 being a limited company.
Are there any issues with buying a property through a limited company?
Mortgages tend to be harder to obtain and generally charged at a higher rate of interest than obtaining one personally. Personal guarantees are normally required too.
Accountancy costs tend to be a little higher that individual rental accounts.
Each case is different, contact us on 0151 931 2724 for individual calculations to see if you are most tax efficient.
