Should I Invest In Property through a Limited Company?

9/12/2020 by David M Slater

Should I invest in property through a limited company?

Since the introduction of Section 24 by the government, the limited Company structure has grown in popularity amongst property investors. This is largely due to the fact that it offers investors the opportunity to deduct mortgage interest as an allowable expense and benefit from a low corporation tax environment. This blog assumes that you are looking to buy and hold property for the long term as an investor rather than at property trading strategies such as buy to sell etc. It will explore some of the advantages and disadvantages of investing personally and through a limited company in order to help you make an informed decision based on your own circumstances. It will help answer the question of whether you should invest in property via a limited company.

What is Section 24? Section 24 of the finance act was introduced in 2017 by the UK government. In simple terms It gradually reduced private landlords ability to deduct mortgage interest as an allowable expense. This was phased in over 4 tax years and from tax year 20/21 Landlords are only able to deduct a 20% relief for finance costs. This has a big impact on higher rate and additional rate investors who were previously able to deduct a relief for finance costs at their marginal rate of tax.

Reasons to continue investing as a sole trader landlord. Firstly let us look at reasons why you might consider continuing to invest in your own name rather than choosing to buy property through a limited company.

Lower costs of finance. Interest rates for buy to let mortgages when investing in your own name are typically lower than when investing in through a limited company. As at 2020 you can expect to pay 1% less on a personnel buy to let mortgage. On a typical £100,000 mortgage this would equate to a £1,000 saving over the course of a year. This is not to be sniffed at. However since limited company mortgages improve in popularity as more and more landlords look to invest through a company, it is likely that products for limited company mortgages will become increasingly competitive. It may be that over time their interest rates normalise to become more in line with personal buy to let mortgages, although there is no guarantee of this.

Basic rate taxpayers. If you are a basic rate taxpayer then there may be some merit in continuing to invest in your own name. This is because section 24 may not have had a material impact on your situation as you are able to continue to deduct a 20% basic rate deduction against your total finance costs. You do need to think about whether it is likely you will remain a basic rate tax payer for the foreseeable future and whether subsequent property purchases may push you into paying tax at the higher rate. You should also consider the earnings of your spouse if you are married, as with some tax planning there could be a way to structure your portfolio to optimally benefit from your respective tax positions. Another less well known impact of Section 24 is that for some basic rate taxpayers will find that they are pushed into being higher rate taxpayers due to the fact that mortgage interest is no longer an allowable expense. The effect of this is their taxable income through property increases and may push them above the threshold. This is something to consider when looking at your own exposure to Section 24.

Access to profit. It is more straightforward for a sole trader investor to access their profits from their rental portfolio than it is for a limited company investor. Sole trader investors can access their profits as personnel drawings, paying income tax. A limited company investor has a number of options including wages, dividends and a directors loan account. All but the directors' loan account options have the potential to create a situation where they will face taxation, in addition to paying corporation tax. An investor who is looking to exit their work to focus on property full time or to retire in the short to medium term may wish to consider some investments in their own name as a means to access profits more readily.

Reasons to consider investing in a company. We have looked at some of the reasons why you might continue to invest in your own name. Now let's look at why you might consider investing in property through a limited company.

Low Corporation Tax Environment. As at 20/21 corporation tax is set at 19%. The conservative government discussed reducing this rate further to 17% however this has been put on a temporary hold. It is quite possible that they will continue with this drive to lower corporation tax, especially in the face of wanting to be seen as pro business in order to continue to attract business to the UK in the wake of BREXIT. For higher rate taxpayers, and those who will likely become so in the near term, the limited company structure offers a means to shelter profits in a low corporation tax environment which in turn will help your wealth to grow faster, as you have to hand less over to HMRC. This difference in tax rate would equate to £2,100 less tax paid on a typical £10,000 profit before tax in a company vs in a higher rate taxpayers own name. This extra profit after tax can then be reinvested into the business to buy more profit and benefit from compounded returns.

Finance costs an allowable expense. Section 24 does not apply to limited companies. This means that mortgage interest and other finance costs are fully allowable as an expense. This has a big impact on compounded returns.

Leverage. When comparing mortgage products between higher rate taxpayers and limited companies, you may find that you are able to borrow more money if you invest through a limited company. This is because of rental stress tests applied by lenders. These stress tests will tend to be more favorable when applied to a limited company using 5 year fixes, working on a lower multiple when compared to a higher rate tax payer investing in their own name. This could enable you to grow your portfolio quicker, particularly when combined with some of the other advantages mentioned above.

Conclusion. Whether to invest in your own name or through a limited company will depend very much on your own personal tax situation. One myth to dispel is that a limited company is not a golden bullet and is not the most suitable structure for all investors, particularly those who are likely to remain basic rate taxpayers for sometime, or those who are looking to access profits in the short term. That aside for many investors a limited company structure can provide an excellent means to grow a portfolio that is sheltered in a low corporation tax environment.

We offer a number of different packages that suit sole trader investors and those looking to invest through a limited company. If you would like to discuss different structures and what might be most suitable for you then please get in touch with us.

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