Since Section 24 (which you can read about here), the UK tax landscape has changed. Following George Osborne’s decision to stop investors and landlords from offsetting mortgage interest when calculating the profit made from buy to let properties, the panorama has shifted.
Whereas before it was considered tax efficient to purchase buy to lets in one’s own name to be able to take advantage of Capital Gains Tax allowances should you want to sell, now the received wisdom has become that investors should opt for a limited company when buying both buy to lets and properties to flip. With this in mind, we now find ourselves in the situation whereby regardless of our strategy, it’s likely that buying property into a limited company is the best route all round.
Of course, there are exceptions to this such as lower rate tax payers, but it is important to be aware that depending on personal circumstances, you can find yourself pushed up into a higher tax bracket so do take some advice from a reputable accountant.
To take a generalised view, for most of us, holding properties in a limited company would be the most tax efficient way to operate post Section 24. A big advantage of this is that as things stand today, we can offset all of our mortgage interest against rents when calculating Corporation Tax – this is currently at 19%. And to be clear, this means not just mortgage interest but also any interest on a business loan.
But as with everything, where there are advantages there are disadvantages. The money that is within the limited company belongs to the limited company (and this is a separate entity to you), and accessing this money is not always straightforward.
There are really only three ways of taking money out of a limited company.
- By taking dividends
- By paying yourself a salary
- By taking a loan.
Let’s have a think about these options. When taking money out as a loan, your limited company
would be required to charge you a commercial rate of interest – and of course, you would be required to pay this money back at some point in the future.
Paying yourself a salary is your second option. Nevertheless, you need to be aware that this will then incur Income Tax. Having said this, although you would pay income tax on a salary taken from the limited company, don’t forget that your salary is a cost to the company. This can be off-set against the profits of the company, and therefore reduces the amount of Corporation Tax paid.
Taking dividends is your third option. The amount you are allowed to take by way of dividends is currently at £5,000; however, this is set to be reduced to £3,000. Also, you need to consider that to be able to do this, the company must be making a profit.
This leads us to question whether we actually want our companies to be making a profit. 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 be making a loss rather than a profit.
While this may sound worrying, for tax purposes, making a loss can be a plus. It would mean that you would not have to pay Corporation Tax. Then again, the upshot of this would be that you also wouldn’t be able to pay yourself dividends. In this scenario, you would only be left with the option of paying PAYE – and then of course, you would be charged Income Tax.
As with everything there’s an upside and a downside, but your accountant will be able to help you decide which is the best route for you.
Peter Jones B.Sc FRICS
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