Tax advantages using a property investment limited company

Tax advantages using a property investment limited company

There are many income tax advantages of using a limited company to purchase buy-to-let properties rather than personal names.

Rental profits on property held in a limited company are not taxed at the personal tax rate but at the current corporation tax rate, which is around half of the higher income tax rate. This is one of the leading tax advantages.

There are other advantages to property investment using a limited company.

Buy to let mortgage for UK landlords | Buy to let mortgage for UK landlords | User a buy to let mortgage calculator

 

What are the basics of tax advantages using a property investment limited company?

There are basics to consider when looking at the tax advantages of using a property investment limited company as a landlord.

For private landlords, profits from rental income are taxed via income tax alongside other earnings.

That means adding the money made from rental income to the amount you receive from a salary, as well as any other money received from shares or dividends.

Income above your personal allowance is taxed at different rates to corporation tax for a limited company.

Currently, the personal tax-free allowance is £12,570.

If you invest in property through a limited company, you will be liable for corporation tax on your profits.

The corporation tax rate is 19%, presenting advantages for landlords.

If you are a higher-rate taxpayer at 45% on income, this presents you with considerable tax saving advantages on any property investment conducted through a limited company.

You will still be taxed if you want to access your rental income, either via income tax on the salary you pay yourself or tax on dividend payments.

Private landlords can no longer deduct any of their mortgage expenses from rental income to reduce their tax bills and maximise advantages.

Instead, they receive a tax credit, based on 20% of their mortgage interest payments.

As a higher-rate taxpayer or additional-rate taxpayer, you won’t get all the tax back on mortgage payments as the credit only refunds tax at the basic rate.

You may also find yourself pushed into a higher tax bracket because you need to declare the income that was used to pay the mortgage on your tax return.

This has been a common problem for many property investors, and why it has made sense to operate their property investment activities through a limited company structure for better tax advantages.

Limited company status becomes more attractive because, unlike property owned by an individual investor, mortgage interest is treated as a business expense for a limited company.

It is possible to deduct the cost of mortgage interest before paying corporation tax due by a limited company on any property investment.

This is one of the most popular advantages.

Landlords planning to pass their property investment portfolio to children and family members can avoid large amounts of inheritance tax by buying the property through a limited company.

They can apply Business Property Relief (BPR) to their income and assets.

Since 2013 property investors have been able to hold shares which qualify for BPR in a tax-efficient ISA.

Public companies cannot access this BPR because their shares are listed on the Stock Exchange.

At the same time, sole traders are forbidden from accessing it if they plan on transferring fixed assets such as premises, land and machinery.

This is a form of tax relief aimed specifically at a limited company and is one of several advantages.

The advantages of using a limited company for property investment can work well for landlords looking to maximise the income from their rental portfolio.

Read here to find out everything you need to know about a property investment company.

What are the advantages of a limited company for property investment?

Some of the main advantages of using a limited company for property investment activities are:

Risk reduction

Your personal assets such as your home are at risk if you conduct your property investment activities in your own name and someone sues you.

A limited company will minimise the assets that can be taken from your property investment business, and these advantages are significant.

Inheritance Tax

By using freezer shares, it is possible to reduce the tax liability through Inheritance Tax (IHT) and pass on assets to loved ones from your rental income.

A limited company can be started with a value of £1 and this enables you to pass on any growth to children and family to avoid future capital appreciation being subject to IHT.

Property in your own name will be subject to IHT on your death. Once assets exceed the IHT allowance of £325,000 to £500,000 for single people and double the amount for married couples the remainder is subject to 40% taxation.

So for every £100,000 that you invest in your property rental business, £40,000 will be subject to IHT.

Growth shares in a limited company allow you to determine that a value of £1 is given to parents any excess is passed onto their children.

When a property increases by £100,000 the IHT will not be £40,000 as the increased property value is passed onto the children through the use of growth shares.

For added security of your property investment rental income and assets, it is also advisable to put the growth shares into a Trust. This gives you major advantages.

Having an accountant or solicitor act as a Trustee also protects your property investment to ensure that the shares and business assets are treated carefully to ensure that all the tax advantages are maximised.

Income Tax

Section 24 for buy-to-let properties means that property investors are subject to income tax plus NIC.

A limited company faces double taxation through initial income taxation and taxation when extracting money from a limited company.

The corporation tax rate is 19% which is less than the basic income tax rate of 20%.

Higher-rate taxpayers pay 40% and additional rate taxpayers are taxed at 45%.

There are many ways to take out money from a limited company that helps you to minimise the tax liability of a property investment business and maximise rental profits kept by the landlord.

These advantages enable you to make the most of your rental income.

Capital Gains Tax

If you made a £100,000 CGT in your own name from a house, this would be taxable at £87,700 less the £12,300 annual exempt amount.

This would be taxable at 28% for high-rate taxpayers being £24, 556.

A £100,000 gain in a limited company from a house would only be taxable at 19%, equalling £19,000.

Property investment through a limited company has some clear tax advantages for a landlord and their rental income.

Buy to let mortgage for UK landlords | Buy to let mortgage for UK landlords | User a buy to let mortgage calculator

Tax advantages using a property investment limited company

There are many income tax advantages of using a limited company to purchase buy-to-let properties rather than personal names.

Rental profits on property held in a limited company are not taxed at the personal tax rate but at the current corporation tax rate, which is around half of the higher income tax rate. This is one of the leading tax advantages.

There are other advantages to property investment using a limited company.

Buy to let mortgage for UK landlords | Buy to let mortgage for UK landlords | User a buy to let mortgage calculator

 

What are the basics of tax advantages using a property investment limited company?

There are basics to consider when looking at the tax advantages of using a property investment limited company as a landlord.

For private landlords, profits from rental income are taxed via income tax alongside other earnings.

That means adding the money made from rental income to the amount you receive from a salary, as well as any other money received from shares or dividends.

Income above your personal allowance is taxed at different rates to corporation tax for a limited company.

Currently, the personal tax-free allowance is £12,570.

If you invest in property through a limited company, you will be liable for corporation tax on your profits.

The corporation tax rate is 19%, presenting advantages for landlords.

If you are a higher-rate taxpayer at 45% on income, this presents you with considerable tax saving advantages on any property investment conducted through a limited company.

You will still be taxed if you want to access your rental income, either via income tax on the salary you pay yourself or tax on dividend payments.

Private landlords can no longer deduct any of their mortgage expenses from rental income to reduce their tax bills and maximise advantages.

Instead, they receive a tax credit, based on 20% of their mortgage interest payments.

As a higher-rate taxpayer or additional-rate taxpayer, you won’t get all the tax back on mortgage payments as the credit only refunds tax at the basic rate.

You may also find yourself pushed into a higher tax bracket because you need to declare the income that was used to pay the mortgage on your tax return.

This has been a common problem for many property investors, and why it has made sense to operate their property investment activities through a limited company structure for better tax advantages.

Limited company status becomes more attractive because, unlike property owned by an individual investor, mortgage interest is treated as a business expense for a limited company.

It is possible to deduct the cost of mortgage interest before paying corporation tax due by a limited company on any property investment.

This is one of the most popular advantages.

Landlords planning to pass their property investment portfolio to children and family members can avoid large amounts of inheritance tax by buying the property through a limited company.

They can apply Business Property Relief (BPR) to their income and assets.

Since 2013 property investors have been able to hold shares which qualify for BPR in a tax-efficient ISA.

Public companies cannot access this BPR because their shares are listed on the Stock Exchange.

At the same time, sole traders are forbidden from accessing it if they plan on transferring fixed assets such as premises, land and machinery.

This is a form of tax relief aimed specifically at a limited company and is one of several advantages.

The advantages of using a limited company for property investment can work well for landlords looking to maximise the income from their rental portfolio.

Read here to find out everything you need to know about a property investment company.

What are the advantages of a limited company for property investment?

Some of the main advantages of using a limited company for property investment activities are:

Risk reduction

Your personal assets such as your home are at risk if you conduct your property investment activities in your own name and someone sues you.

A limited company will minimise the assets that can be taken from your property investment business, and these advantages are significant.

Inheritance Tax

By using freezer shares, it is possible to reduce the tax liability through Inheritance Tax (IHT) and pass on assets to loved ones from your rental income.

A limited company can be started with a value of £1 and this enables you to pass on any growth to children and family to avoid future capital appreciation being subject to IHT.

Property in your own name will be subject to IHT on your death. Once assets exceed the IHT allowance of £325,000 to £500,000 for single people and double the amount for married couples the remainder is subject to 40% taxation.

So for every £100,000 that you invest in your property rental business, £40,000 will be subject to IHT.

Growth shares in a limited company allow you to determine that a value of £1 is given to parents any excess is passed onto their children.

When a property increases by £100,000 the IHT will not be £40,000 as the increased property value is passed onto the children through the use of growth shares.

For added security of your property investment rental income and assets, it is also advisable to put the growth shares into a Trust. This gives you major advantages.

Having an accountant or solicitor act as a Trustee also protects your property investment to ensure that the shares and business assets are treated carefully to ensure that all the tax advantages are maximised.

Income Tax

Section 24 for buy-to-let properties means that property investors are subject to income tax plus NIC.

A limited company faces double taxation through initial income taxation and taxation when extracting money from a limited company.

The corporation tax rate is 19% which is less than the basic income tax rate of 20%.

Higher-rate taxpayers pay 40% and additional rate taxpayers are taxed at 45%.

There are many ways to take out money from a limited company that helps you to minimise the tax liability of a property investment business and maximise rental profits kept by the landlord.

These advantages enable you to make the most of your rental income.

Capital Gains Tax

If you made a £100,000 CGT in your own name from a house, this would be taxable at £87,700 less the £12,300 annual exempt amount.

This would be taxable at 28% for high-rate taxpayers being £24, 556.

A £100,000 gain in a limited company from a house would only be taxable at 19%, equalling £19,000.

Property investment through a limited company has some clear tax advantages for a landlord and their rental income.

Buy to let mortgage for UK landlords | Buy to let mortgage for UK landlords | User a buy to let mortgage calculator

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