Updated: Mar 19, 2020
Before making any investment decisions speaking to a qualified accountant is highly recommended, please ensure you seek professional advice ensuring that your personal circumstances are taken into consideration when making any decisions.
Some of the detail The current personal tax-free allowance is £12,500 meaning you can earn £12,500 in your own name and not pay any tax.
If you earn over £12,500 and below £50,000 you will be a 20% tax payer.
The higher rate tax (40%) threshold is currently £50,000, and 45% “additional-rate” for earnings over £150,000.
Corporation tax (the tax you pay on your earnings if in a LTD company) is currently 19% and is maintained at this “flat-rate” irrespective of the level of income received into the company.
You can “vote” dividends to yourself (the return of profit from the company after corporation tax and expenses/liabilities are taken into account) from a LTD company, of which the first £2,000 are taxed at 0% annually; however this does count towards your annual income.
If you pay yourself a wage from a LTD company you will pay both corporation tax of 19% and income tax at the current rate you are on so 20% or 40% - however, taking a wage from a company only makes sense if it forms part of a wider tax plan, i.e. if it can be earned within your personal allowance when you have no other PAYE earnings.
LTD Company or not?
Using a LTD company is of restricted benefit to a basic rate (20%) tax payer although it should be noted that if an investor’s long-term intentions are to grow a substantial portfolio then it is a good vehicle for the future even if the advantages of using a limited company are somewhat limited in the first instance.
A more obvious benefit arises once an individual exceeds the higher rate tax threshold, which can be achieved with a mix of property income and personal income. It is also at this higher-rate level of income that the much maligned section 24 rules come into play (which restricts the investor’s ability to claim mortgage-interest against their property income); Section 24 restrictions do not apply to limited companies so in this sense they offer a further advantage. Finally, we should not forget the limitation of liability itself that the company status brings with it.
Due to this, a LTD company vehicle can result in considerable tax savings for a higher rate (40%) tax payer, and this is especially so if the investor is prepared to retain some of their profits in the LTD company. It is worth noting that the maximum tax-saving can be achieved by leaving all profits within the company, although this clearly depends on your investment and tax strategy. Investors following this tactic often use these accumulated or retained profits within the company to fund future investments.
If you only plan on buying one BTL property a LTD company is not likely to be the best option for you, however if you believe a LTD company is the best route, you need to remember your monthly income will be reduced due to accountancy, admin and compliance fee`s associated with owning a LTD company. Also statistically speaking – a one-time investor is more likely to sell a property after a few years so they’ll get hit with the ‘double tax effect’ if the property is sold from a limited company i.e. capital gains on the sale and then followed by higher-rate dividend tax when subsequently extracting the sale-proceeds from the company.
It is possible depending on an investors goal and circumstance that a BTL property is not always financially the best option: overall an investor must consider tax and investment strategy (or lack of), investor’s tax rate, section24, who else is investing, etc. Specific circumstances are ultimately what will dictate how best to or even if an property investment is a good financial move.
The chances are – on balance – that if an investor plans to grow a portfolio of any decent size (5+ BTLs) then - lenders permitting - a limited company is likely to be the way to go.
20% taxpayer – many lower rate taxpayers tend to buy in personal name, although a limited company may be considered if the investor is looking to grow a larger portfolio over the long-term.
40% taxpayer – many higher rate taxpayers and serious investors tend to buy in LTD company. They expect decent tax savings if some (or especially all) profits are left in the company and they plan to buy more than one. This route is also especially good due to the section 24 advantage on the mortgage-interest. That being said, for a one-off investment, many investors would buy in their own name – even if they are higher-rate taxpayers, mainly due to the level of admin around using a limited company for just one property, increased accountancy fees, and mitigating the double-tax if subsequently selling.
You will also have to pay stamp duty whether buying in a LTD company or your own name at a rate of:
3% £0 - £125,000
5% £125,001 - £250,000
8% £250,001 - £925,000
13% £925,001 - £1,500,000
Its possible to be savvier with paying tax by utilising partners, wives and husbands but again we suggest you speak to a professional to ensure you are best set up for complete success.
It`s highly recommended to seek professional accountancy/tax advise as individual circumstances always need to be considered.