Back on August 7th, 2017, we published a big article on buy-to-let tax changes and you. The topics covered in that blog post have led to a change in the way that many buy-to-let investors actually purchase properties for rental. And a lot of you have been asking us “should I use a company to hold buy-to-lets?”
We’ll look at some of the issues about holding your buy-to-lets in a limited company in this article and compare it with holding property personally.
Please note that this article does not cover the transfer of buy-to-let properties from an individual to a limited company. The article assumes that you will hold onto the buy-to-let properties for long-term capital gains and for cash flows from tenants – it does not cover property trading (buying somewhere, doing it up, and selling it on).
We’ll write about both of those topics soon for you.
Limited companies and buy-to-let properties – what you’re paid and how it’s taxed
Any income (that is profit) you receive from your buy-to-let properties as a person is added onto your earnings and you’re taxed upon it at either 20% (for earnings up between £11,500 and £45,000, £43,000 in Scotland), 40% on earnings between £45,000 (£43,000 in Scotland) and £150,000, and 45% on earnings above £150,000.
With limited companies, it’s different. Any profits you make are subject to 19% corporation tax which is scheduled to fall to 17% by 2020.
Houses held personally can have up to five owners and the legal framework surrounding that type of ownership is complex, especially when there is a mix between people and companies.
Limited companies can have as many shareholders as they like - this is quite standard. If you wanted to, you can issue shares in a limited company to other family members and use a mixture of salary and dividends to keep personal tax payments to a minimum.
When you take out the money, you will be subject to dividend tax. Your first £5,000 in dividends is tax-free (although that drops to £2,000 from 2018/2019) but if you’re earning more than £45,000 a year (£43,000 in Scotland), you’ll pay 32.5% on those dividends.
Payment by salary and dividends offers a marginal advantage if you earn between £20,000 and £170,000 a year. After £170,000 or thereabout, the salary and dividend option becomes more expensive than a mixture of income tax and National Insurance.
Limited companies and buy-to-let properties – losing money
If you hold property personally, you can offset losses against other income you make from property or carry it forward.
You can’t do that with limited companies. The company can offset the loss but the shareholders can’t. As long as the business continues to trade, corporate losses can be carried forward or back.
Limited companies and buy-to-let properties – the treatment of mortgage interest
For many investors, this is the reason why they want to place any future purchases into a company.
From 2020/2021, mortgage interest tax relief will not be available to people personally holding property. However, this benefit is not stopping if your buy-to-lets are held in a company.
Limited companies and buy-to-let properties – who lends to limited companies?
Not so long ago, very few lenders offered companies mortgages on buy-to-let properties. There has been, however, much more movement towards competition between lenders for this type of business in the last 12 months.
It’s still more expensive though and you will almost certainly need to give a director’s guarantee. Be very careful when it comes to director’s guarantees. We mean it!
Limited companies and buy-to-let properties – the longer-term view
If you hold property personally, all of your property income is taxed at up to 45% – full stop. You can’t split it up and ask the taxman to only levy you 45% on some of it that you want to use later to buy more houses.
However, as a limited company, you can leave money in the account to accumulate after corporation tax of 19% has been applied. This cash could be used to fund further purchases at a later date.
Limited companies and buy-to-let properties – talk to Panthera
Want our help to work out what’s right for you? Please call Panthera on 01235 768 561 or email the team at firstname.lastname@example.org.