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Is it worth buying my investment property through a company?

2-minute read

Is it worth buying my investment property through a company?
Mollie Millman

Mollie Millman

29 March 2016

Landlords would be forgiven for thinking that the recent tax changes imposed by the Chancellor mean an end to their lives as property investors.

But there is a potential solution that could see some landlords sheltered from the tax hikes.

For those with appropriate circumstances, purchasing a buy-to-let property through a company will mean paying less tax.

How will my profits be hit under the next tax regime?

The main advantage in buying via a limited company would be to shift the personal income tax liability to a corporate one. This is because corporation tax rates are lower.

Until now, buy-to-let properties have been highly tax efficient as borrowers can offset their mortgage interest, professional fees and wear and tear against their personal rate of tax.

However, the new tax regime announced by George Osborne means that the tax relief available to landlords is being reduced.

The reductions are being introduced gradually from next April and will see borrowers only able to claim maximum tax relief of 20 per cent regardless of their personal income tax rate.

It means that until then a borrower can deduct all of their interest against a pre-tax profit.

How does buying through a company change things?

Take, for example, a landlord with a rental income of £7,200 a year, who pays mortgage interest of £3,000. It would mean a profit of £4,200, which they would then pay tax on at the relevant level, which - if at 40 per cent - would be £1,680.

However, under the new rules, landlords cannot deduct the interest and so the tax payable at 40 per cent would be on the whole rent. This would give a tax liability of £2,880.

Only 20 per cent of the interest costs can be deducted, which - in the case where they pay mortgage interest of £3,000 - would be £200. It means that the final tax bill under the new regime would be £2,280.

By contrast, this landlord pays less tax if their property is held within a corporate structure - i.e. owned by a company they set up.

This is because the corporation tax rate will be down to 18 per cent by the time the new tax regime is fully implemented in 2020.

In addition, all of the interest costs can be deducted from the pre-tax profit.

Are there any drawbacks of buying through a company?

There are potential drawbacks of buying a property via a company. These include lenders tending to charge higher borrowing rates.

Any borrowers who have existing properties and are considering moving them into a limited company should speak to their tax adviser to calculate the figures for their individual circumstances. These will need to take into account factors such as stamp duty, capital gains tax and the higher lending rates for those buying via a company. You can find our own step-by-step guide to setting up a limited company here.

Do you currently purchase through a limited company? Tell us how it works for you in the comments section below.

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