What are the tax savings in buying property through a limited company compared to ownership in your personal name? For higher rate taxpayers the savings are clear. I will illustrate this from an example from additions recently to my own portfolio.
One of my long term letting agents called me a couple of years ago to offer me first refusal on 4 BTL’s that another landlord client wanted to sell. These were 2 bed, modern mid-terrace properties in a West Midlands City. The asking price was £160,000 each with a gross rental income of £750 per month. My mortgage adviser informed me that interest rates were generally 1% more expensive for mortgages to a limited company than to myself personally. I was quoted 5 year fixed interest only rates of 2% in my personal name and 3% in a limited company.
Requiring a 25% deposit on each I borrowed £120,000 per property but before doing so I took the advice I give to clients and put the figures into a spreadsheet to show the tax savings.
| Private Ownership | Limited Company | ||||
| Rental Income | 36,000 | 36,000 | |||
| Interest | – 14,400 | ||||
| Other expenses | |||||
| Letting agent fees | – 4,320 | – 4,320 | |||
| Insurance | – 800 | – 800 | |||
| Repairs | – 2,500 | – 2,500 | |||
| Accountancy | – 180 | – 720 | |||
| Other Costs | – 250 | – 250 | |||
| Profit (loss) Subject to tax | 27,950 | 13,010 | |||
| Tax | 11,180 | 2,472 | |||
| Interest paid | 9600 | ||||
| Tax relief on interest | – 1,920 | ||||
| Profits for withdrawal | 10,538 | ||||
| Net Tax | 9,260 | 2,472 | |||
| Total Net Income | 9,090 | 10,538 | |||
| Better off in Limited Company | 1,448 | ||||
Okay, so whilst it is not a fortune, over the next 20 years the savings amount to £28,960 just in income tax. Enough deposit for another property? If prices were to double my inheritance tax exposure would be an additional 40% of £640,000 ( 4 x £160,000) being £256,000 if kept in personal ownership. By setting up my company as a Family Investment Company I could reduce this to nil.
I can also pay myself back the deposits I have loaned the company, tax-free, without having to re-mortgage the properties to pull out my equity.
I’m hoping that my son will finally marry his lovely girlfriend and a grandchild comes along. Apart from my unbounded joy, I will gift a very small percentage to my grandchild so that I can pay out another £14570 in tax free dividends. I think that would certainly help with childcare costs and build a pot for future educational needs.
These are just some of the advantages you can easily achieve by holding property in a limited company if you are a higher rate taxpayer. If you’re thinking about buying rental properties and want help in deciding if you should own the property in your personal name or through a limited company then take up my offer of a free 30 minutes consultation. I will go through the pro’s and cons and give you straightforward clear advice based on your actual circumstances.
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