This weeks newsletter is going to give some more thought to holding our properties in a limited company.
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 more 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 – especially if you’re a higher rate taxpayer.
Now I say ‘probably’ because there are of course exceptions. If you’re a lower rate tax payer you may be OK – but this will depend upon your personal circumstances because with changes to the way mortgage interest is used or offset, you could find yourself pushed into a higher tax bracket. 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 at moment, 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, whereas before, if it was in your name you could get your hands on the money, when it’s in a limited company it’s not quite as straightforward.
Now you may think I’m being crude, but this is why we are all actually in business, isn’t it? The money belongs to the limited company and the company is a separate entity to you. So, how can you get your money out of a limited company?
There are really only two or three ways you can do this. 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 offset 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 £3,000. 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).
Let’s also paint another scenario. If you’ve made a loss because you’ve repaired your properties and if that loss has been enhanced by it because you’ve taken a salary (remember, your salary is a cost to the business), then when you sell the properties, the capital that you release as profit may even tax set off . Of course, this would depend on what your losses are carried forward, the sale price of the properties and how much of that is actually profit.
However in summary, it is as, mentioned not a one-size-fits-all approach and the tax efficiencies will depend on your investments and property portfolio. If you’re holding property for the long term, it’s likely to be beneficial – but it’s very important to seek independent tax advice before considering the limited company route.”
Landlords with existing properties also face a significant financial hurdle if they want to transfer these to a limited company. As well as a potential capital gains tax liability, there will also be further stamp duty to pay on each property transferred so this could be prohibitive that the tax cost of limited company lending is likely to shape up in the future. But if you already own the property, the costs and hassle of moving them into a limited company could prove to be over complicated and a financial burden that can not be offset sufficiently.
You should also consider that the Government may look to lessen the appeal of holding rental properties within in a limited company structure by equalising the tax treatment of individual and limited company landlords.
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. 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.