Investing in property can be a great idea if you are looking to save on tax payments. You can purchase a buy-to-let property as an individual (or partnership) and a limited company.
Of course, the tax on rental income will differ in each case, and you want to ensure you are investing in a way that minimises your tax bill while maximising your income from the rental property. In this blog post, we offer a quick guide to getting started:
Personal Ownership
Tax implications
The calculations on the tax for rental income for individually-owned properties are easy – subtract allowable expenses from the rental income to get the profit amount. Then pay tax depending on your marginal rate.
There is a basic rate deduction of 20% that you get to cover financing costs like mortgage interest payments – you cannot claim mortgage interest as an expense on its own when paying tax on your rental income.
Legal identity and liability
When you own property as an individual, there is no distinction between your personal and business assets, meaning all your assets could potentially be at risk to cover any debts or liabilities related to the income of the rental property.
However, as an individual buyer, you avoid all the extra admin hassle of running a company and meeting the legal formalities. Moreover, mortgage interest rates are lower for individuals – 2% compared to 3.5% or so for limited companies.
Another advantage is that rental income is readily available to you as a private owner. In contrast, you can only take out income in the form of dividends as a limited company shareholder.
And last but not least, buying property as an individual gives you access to a larger number of lenders at more competitive lending rates, with fewer checks conducted prior to lending than other forms of ownership.
Limited Company Ownership (or SPV)
Tax implications
For limited company ownership, you arrive at profits the same way. However, mortgage interest payments are fully allowable and deductible from profit, thus reducing the amount on which you need to pay tax.
Property owned as a limited company is taxed at the corporation tax rate of 19%, while property owned as an individual could be taxed up to 45%, depending on the owner’s marginal rate. This could be more advantageous than paying tax on the rental income as an individual.
For this reason alone, many buyers have recently elected to purchase through a limited company rather than on their own. However, it is important to note that VAT or stamp duty land tax calculation happens the same way whether it is an individual or a company making the purchase.
Legal identity and liability
A limited company has its own separate legal identity. Essentially, the buyer sets up a limited company or Special Purpose Vehicle (SPV), which is purely for the purpose of property purchase.
The buyer then deposits funds into the company and arranges for lending that allows the company to purchase property in its name.
The shareholders’ liability is limited to the value of the shares they hold – their personal property or assets cannot be called in to meet the company’s debts.
There is an exception, though – in the case of owner-managed companies, banks may need personal guarantees from the company director when taking out a loan.
So, buying property as a limited company does not always absolve you fully of personal responsibility. Also, a limited company’s interest rates and fees can be higher.
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Partnership ownership
Tax implications
The property ownership in a partnership can be divided as the partners wish, even if it differs from the partnership ratio.
Suppose you are an individual holding property as a partnership. In that case, you might be able to take advantage of more deferment claims or exemptions on activities like the disposal of assets compared to a limited company situation.
Legal identity and liability
As a partner, you have unlimited liability – so if there are liabilities to pay off, your personal assets may be called upon, thus making it a riskier form of ownership.
Limited Liability Partnership (LLP)
Tax implications
This is a good way to work around the unlimited liability of a regular partnership. In an LLP, each partner’s liability is limited to the amount they have invested in the partnership.
These tend to function more like limited companies, except that each individual owner is taxed on their share of gains or income depending on the individual’s marginal rate of tax (which could be up to 45%) – the way to optimise this is by assigning the profit to the partner with the lowest marginal tax rate.
Moreover, regardless of whether profits are extracted or reinvested in the business, there will be National Insurance contributions to consider.
Legal identity and liability
Limited liability partnerships offer a way to limit the financial risk to the money invested in the business, thus protecting other personal assets.
Keep an eye on the latest updates on the property tax in the UK
In the fast-paced world of property investment, understanding the current market trends and upcoming legislation changes can be as crucial as knowing the tax implications of different ownership structures.
For instance, fluctuations in interest rates can significantly affect your mortgage payments, regardless of whether the property is personally owned or part of a limited company.
Similarly, any legislative changes concerning the landlord responsibilities or the property tax in the UK could impact your investment strategy and financial outcomes.
To stay ahead of the curve, consider subscribing to property investment newsletters, following authoritative blogs, and attending industry webinars.
These resources can offer timely insights into market conditions and regulatory changes, helping you adapt your investment strategy as needed. Staying informed enables you to adjust your portfolio and ensure you are optimising for both short-term gains and long-term security.
In conclusion
Owning property can look very different depending on the type of business entity you are functioning as. Choosing an option depends on multiple factors, such as the tax and mortgage interest you will have to pay and the costs of running your business entity.
We always recommend working with a tax specialist who can guide you through the legal requirements and help you keep your tax bill to a minimum, no matter which model you choose. Need a hand with that? Reach out for a free consultation today.
