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Landlord Taxation – Options

Landlord taxation options

 

Landlord Taxation – Would I save tax if I held my next rental property in a company?

Landlord taxation has become a big issue for many following the announcement of a number of tax changes which means that the tax on rental properties owned by individuals has already increased, and is due to increase further. Landlords are looking at straightforward ways to minimise the tax they pay on their property income. One of the options explored by many is whether they would save tax by owning property through a company that they own. This article deals with some of the tax implications of doing so.

Landlord Taxation – Tax on rental profits

The main tax advantage of holding rental properties in companies is that the Corporation Tax rate on rental profits is currently 20%. Even better news is that the rate of Corporation Tax is expected to decrease to 19% in April 2017 and furthermore to 17% by 2020. This compares favourably with the current tax rates for individuals, which, before taking into account the tax implications of the new loan interest rules, can be 40% for higher rate taxpayers, and 45% for those who earn more than £150,000 a year.

The new loan interest rules, which are due to be introduced from April 2017 mean that the amount of tax relief on the loan interest paid to fund a residential property purchase will reduce from the current tax rate to 20%. The full restriction doesn’t come in all at once, but is phased in over four tax years, so by 2020 the maximum relief is 20%. This will increase the tax on landlords who have a mortgage to fund the property portfolio, even if their rental profit stays the same. This restriction will not apply for companies. This change will make owning properties through companies even more compelling.

Don’t forget that things are often too good to be true… if the property is owned by a company, the profits are then those of the company and are not able to be used by the landlord personally without considering the additional tax on taking the funds out. This is usually done with a dividend, and that means there will be tax to pay. The amount taken as a dividend will determine how much tax is due. If matters can be structured to minimise dividends, usually as the profits are paying down company debt, or building a portfolio, the tax savings on the rental profits of owning property in a company can be advantageous.

Landlord Taxation – Tax on the sale of the property

 The sale of a property held by a company is charged to Corporation Tax (20%) just like the rental profits. This also compares favourably with the current rate of Capital Gains Tax, which, for residential property owned personally, is 28%. While a company does not get an annual exemption (£11,100), it does get relief for the gain that is attributed to inflation over the period.

 If the proceeds, after Corporation Tax, are left in the company, perhaps to fund a new property purchase, then there is no need to consider tax on taking the money out of the company by way of a dividend. If a dividend is taken then the tax differences can be quite substantial and eat quite significantly into the profit earned on the sale.

Other aspects of Landlord Taxation to consider

You shouldn’t just focus on the taxation, there are very important commercial aspects to consider when making the decision including:

  •  The costs of setting up and running a company.
  •  The requirements of Companies House and HMRC.
  •  The additional costs of a mortgage. Interest rates and fees for loans to a company are usually more expensive than loans to individuals.
  •  The future intentions of the landlord. For example, how long do they intend to be a landlord?  Will they be a basic rate taxpayer in the future? What is to happen in retirement? Do they intend to transfer property to their children? Who will inherit the property/company on death?

Landlord Taxation – Conclusion

 As you would expect, there is no simple answer as it depends upon the circumstances of the investor, however, as a general rule, you should compare the costs and consequences of owning property yourself against those of owning it in a company over the longer term.

 There are a number of factors to take in to account when working out which is the best way to hold your property. For example, in a company the extra costs in mortgage interest could eat away at the tax savings on the rental profits, which mean that you would be worse off than if you had just held it yourself.

 There is no substitute for professional advice from a tax advisor. Making the wrong decision can be costly to reverse. An advisor can help explain how the tax rules work in your circumstances and help you to put together a cost benefit analysis. The tax rules can also of course change each year which alters the analysis.

 For further information or help in deciding the right way to structure your buy to let portfolio, please get in touch with the property expert team at http://www.source.investments/#contact-us

 This blog was written with the help of the national audit, tax and accounting firm Crowe Clark Whitehill. Tax director, Mark Stemp can be contacted on 0118 9597222 or mark.stemp@crowecw.co.uk    Crowe-Clark-Whitehill 

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