Property and UK Tax (Part 3)
Last week we were looking at the best way to set up our property businesses prior to the changes to Section 24, and this week we’re going to give some thought to holding our properties in a limited company.
Let’s first recap. In 2015, George Osborne decided to no longer allow investors and landlords with properties in their own names to offset mortgage interest when calculating the profit made from their buy to let properties.
As such, the UK tax landscape has changed. Prior to Section 24, the received wisdom was that buy to lets should be in one’s own name to be able to take advantage of Capital Gains Tax allowances if you ever needed to sell. But as I explained last week, today the received wisdom has become that you should now opt for a limited company when buying both buy to lets and properties to trade (or flip).
So, we are now in a situation whereby regardless of the strategy you’re following, you probably want to be in a limited company. Now I say ‘probably’ because there are of course exceptions – so as always, talk to your accountant.
For most of us though, probably the best way forward with Section 24 is to do everything through a limited company.
The big advantage of using a limited company is that as things stand today, we can offset all of our mortgage interest against rents when calculating Corporation Tax. To be clear, this means not just mortgage interest but also any interest on a business loan. This is a big plus, especially as Corporation Tax is relatively low at 19%, with talk of it going down to 17%.
However, there are disadvantages. All of the money that you have within your limited company is within the limited company.
So, how can you get money out of the limited company?
There are really only two or three ways you can get money out of a limited company. The first is by taking dividends, the second is by paying yourself a salary, and the third is by taking a loan. Let’s think about these in reverse order.
Whilst it’s certainly possible for the company to loan you money, your company would have to charge you a commercial rate of interest. What’s more, you are going to have to pay this money back at some moment in time or HMRC will cry foul play.
Paying yourself a salary is certainly another option. However, the difficulty with paying yourself a salary is that you’re going to be charged income tax. Unfortunately, there’s no way around this. Having said this, although you’d pay income tax on a salary taken from a limited company, don’t forget your salary is a cost to the company and can be off-set against the profits of the company, and so reduces the amount of Corporation Tax paid.
Taking dividends is your third option. However, the amount that the Government is allowing us to take out of a limited company by way of dividends is reducing, with the figure going down from £5,000 to £2,000. What’s more, there’s also another stumbling block – you can only take a dividend if the company is making a profit.
Now you might say, well, what’s the problem with that? Sure, we want our companies to make a profit, but do we? When you think about it – and when you take into account all the costs involved in, for example, refurbishing a property – it’s highly likely (if not probable) that at some point your limited company is going to make a loss.
As it happens, for tax purposes this might actually be a plus because then you won’t have to pay Corporation Tax. But if this is the case, then you also won’t be able to pay yourself a dividend. In turn, this means that you’ll only be able to pay yourself PAYE – and then you’ll be charged Income Tax.
What you might not realise is that the benefit of making a tax loss is that this loss can be carried forward. So, if you do make a profit in future years or if, for example, you want to sell your properties and make a nice capital gain on those properties, capital gain within a limited company is going to be charged at Corporation Tax. (There isn’t a separate tax for whether it’s rental income or whether it’s a capital gain from a sale – it all comes under Corporation Tax).
As with everything there’s an upside and a downside to all of these options, but your accountant will be able to help you decide which is the best route for you. For most of us though, buying into a limited company – whether for buy to let or buy to sell – is probably going to be the best way forward.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: