TAX: Invest through a ltd Co?

With the tax landscape built on constantly shifting sands, Paul Weller from BTL Group partner tax advisors Astonia Associates tackles one of the most common conundrums for investors – limited company or not?

We often get asked about whether properties should be bought personally or through a limited company structure. The answer, as always, is that it depends upon your own personal and family circumstances and there are various important areas to mull over in making the decision. The tax system is always changing as underlined by the recent government Mini Budget – The Growth Plan – which caused the tax profession many issues by abolishing of the top rate of tax of 45p for those earning over £150,000 per year, only to reverse this decision shortly afterwards. It makes tax planning virtually impossible when the rules keep changing and there is uncertainty but this is the world we are all currently living in.

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POINT TO PONDER

The rules for working out taxable profits are essentially the same regardless of whether the property is owned by an individual or by a company. However, where the property rental business is carried on by an individual, those profits are charged to income tax at the taxpayer’s marginal rate of tax – 20%/40%/45% whereas if the rental business is operated by a company, the profits are chargeable to corporation tax – which is currently 19%. Mortgage interest rates should always be considered when weighing up personal versus company purchases as the interest rates do differ but this also needs to be considered along with the section 24 legislation that restricts the interest a personally/partnership-held property can offset against rental income. S24 restrictions do not currently affect properties held in a corporate structure therefore full interest relief is available. A corporate structure also allows for effective future tax planning for inheritance tax and the inclusion of other family members in the company for current or future tax planning opportunities. If the profits are subsequently extracted from the company, depending on the method of extracting and the recipient’s personal tax situation, there may be personal dividend tax to pay on the extracted profits.

If profits are left in the company then no further personal tax is payable so it is a great tax efficient way to accrue deposits for future property purchases or for business growth. A director/shareholder will inject cash into the company to fund property purchases. This injection is generally in the form of a Director’s Loan (Directors Loan Account - DLA). This can be repaid tax free to the director once funds are available, if required. Therefore, allowing access to the deposit quicker than personally buying a property. This would be achieved on sale of the property or refinancing.

TRUSS BUT VERIFY

The PM (at the time of writing) failed to get the experts to weigh in on her financial plans before it was too late. Don’t make the same mistake. Do your own research, wrestling with the points above, but it is vital that you seek the advice of a trained and experienced tax advisor who can consider your whole investing and financial picture and help you decide whether you should be picking out a limited company name or sticking with personal property investor route.