Discover why owning your residential investment property in a company rather than owning it personally could save you a substantial tax bill
If you own residential investment property, be it one or more buy-to-let or HMO properties on which there’s a mortgage, you could suffer more Income Tax due to mortgage interest relief restrictions that came into force in April 2017. As companies aren’t affected, it’s worth considering whether you should move your investment property into a company.
The Mortgage Changes Affecting Investment Property
The new mortgage interest relief restrictions are likely to push thousands of mortgaged landlords into the higher rate of Income Tax. It’s because tax is charged on pre-interest rental profits, with a flat 20 per cent credit for mortgage costs being deducted from your tax bill. No longer can you fully offset your mortgage interest against your rental income.
If you own investment property on which you have a mortgage, it could mean you incur some surprisingly high rates of tax. It could massively reduce your profits and in the worst case, render your business unviable for the hassles that accompany direct residential property investment.
By contrast, if your investment property is held within a company, all of the mortgage interest remains tax deductible, for it’s not subject to mortgage interest relief restrictions.
On the face of it, owning your investment property via a company sounds like a ‘no-brainer’. However, there could be a number of areas that might make this decision unwise or uneconomic, leaving you better off suffering the increased Income Tax, no matter how unpalatable that might be.
In short, if you personally own buy-to-let or HMO investment property with a mortgage, or you’re considering doing so, it’s definitely worth exploring in detail whether incorporation is a suitable strategy for you.
Watch The Video To See The Investment Property Mortgage Changes
If It’s Better To Own Your Investment Property In A Company, You Could Consider A SSAS
The Sole Purpose Of A SSAS Is To Provide Retirement Benefits For The Members, Or In The Event Of A Member’s Death, Benefits For Dependants And Other Potential Beneficiaries.
Trading companies can set up a self-invested pension: SSAS (small-self administered scheme). This is a company pension that enables you to invest in a wide range of HMRC approved asset classes, including commercial property, peer-to-peer lending, stockmarket assets and much more. Your SSAS, however, can’t invest in residential property of any sort, without it incurring substantial penalties from HMRC.
SSAS is often more flexible than a SIPP and it can be more cost effective in respect of charges if two or more business colleagues or family members join the SSAS.
A valuable feature of a SSAS is that it can grant a loan to your company. The main regulatory requirements are:
- It must not exceed 50 per cent of the net asset value of the SSAS
- It should be secured via a first charge against an asset of equal or greater value to the loan capital, plus interest over the period of the loan
- The maximum term is five years
- An interest rate of at least one per cent higher than the Bank Of England base rate should be applied
- It must be repaid with equal instalments of capital and interest throughout the term
Here are five benefits of granting a SSAS loan to your company:
- To provide a cash injection into your company, so it can purchase more investment property
- To provide a competitive source of funding, which could be cheaper than mortgage funding
- To enable your company to pay a higher interest rate, to reduce its profit and its tax bill
- The loan interest is tax deductible in your company, but it’s tax free when it arrives in your SSAS
- To provide a more predicable return for your pension, compared with volatile stockmarkets
Your SSAS could be funded with transfers of your other pension schemes. You could also make personal or company contributions to your SSAS, on which tax relief will be available, subject to HMRC limits.
A SSAS can have up to 11 members, enabling you to combine your pension pot with others, to create a sizeable fund to grow your investment property business. The people you invite to join your SSAS don’t have to work for your company. It could open up some significant opportunities for you, in conjunction with family members, business colleagues and friends with a common interest in investment property.
The Pluses and Minuses Of Owning Investment Property In A Company
In no particular order, here are eight advantages and eight disadvantages of owning your investment property in a company.
Advantages Of Company Owned Investment Property
1. Higher Tax Relief
From 2017 to 2020, if you own your investment property personally, the amount of tax relief you can claim will progressively be reduced from a maximum of 45 per cent to 20 per cent. This reduction doesn’t affect companies. So if you’re currently a higher tax payer, or you’ll be pushed into this bracket when your gross rental income is added to your other income, you’re likely to end up paying less tax via a company.
2. Tax Free Dividend Income
The Dividend Allowance could potentially enable you to receive a tax free income from your investment property, by drawing dividends from your company.
3. No Income Tax When Reinvesting Company Profits
Your investment property could grow more quickly via a company, for there’s no Income Tax payable on profits you retain in your company. This could give you more cash to invest in further investment property.
4. Personal Tax Saving
Although Corporation Tax is payable on your trading profit, the rate chargeable is significantly lower than higher rate Income Tax, which could reduce your overall tax liability. And because you can control how much income you withdraw from your company, retaining funds as appropriate, there’s a potential for a further reduction in your tax bill.
5. Personal Funds Can Be Drawn Out Of The Company
Any personal investment you make to your company can be drawn back out as a director’s loan, which could be tax efficient depending on your circumstances and those of the company.
6. Easier Change of Ownership
If your company owns your investment property, should you wish to dispose of it entirely, instead of having to sell your investment property individually with all the associated taxation and other implications, you could simply sell your company. In addition, directors and shareholders can be changed when it’s appropriate: for example, you may wish to add a new person who’s investing funds or buying out retiring directors or shareholders.
7. Personal Expenditure
It’s often the case that mortgages taken out by your company are not taken into account as your personal commitments. The net result is that it could enable to you secure increased personal borrowing.
8. Protection Of Your Credit Rating
It’s not uncommon for landlords owning investment property personally to be held liable for the debts of tenants in respect of unpaid utility bills and Council Tax payments. This could adversely affect your credit rating. If your company owns the investment property, the Land Registry documents will show your company name, reducing your risk and providing you with additional privacy.
Disadvantages Of Company Owned Investment Property
1. No Capital Gains Tax Allowance
When you sell an investment property you own personally, you would normally be able to offset any gains against a Capital Gains Tax allowance. Companies aren’t eligible to claim this allowance.
2. Property Transfer Costs
If you want to transfer your existing investment property into your company, you could incur Stamp Duty Land Tax, legal costs, remortgage fees, and if you’ve made a capital gain over and above your allowance, a further tax bill. There are some ways to mitigate some if not all of the taxes, as you can see from the links to other articles in the pink box below.
3. Administrative Tasks
Complying with company law and submitting your accounts to HMRC can be more involved and time-consuming compared with acting as an individual. It can often be more costly too, as you might need to involve your accountant to help you meet your obligations.
4. Higher Mortgage Rates
With a few exceptions, mortgage lenders will generally charge higher interest rates and increased fees for company mortgages, compared with mortgages granted to you personally.
5. Reduced Lender Choice
The number of lenders willing to grant mortgages to companies is fewer than those who are happy to grant mortgages to individuals. It goes without saying that less choice can mean a higher interest rate.
6. Higher Legal Costs
Conveyancers often charge extra fees for companies as a result of the extra workload involved: for example, registering mortgages at Companies House and ensuring Anti-Money Laundering Regulations are met.
Your personal tax documents are between you, your accountant and HMRC, whereas your company is required to publish accounts that will be available at Companies House for all to see.
8. Releasing Equity
Any money released by refinancing your investment property will be available to the company and not to you personally. If you intend to draw out the money, it’ll be classed as income and will be taxed accordingly.
When Transferring Your Investment Property To A Company May Not Make Sense
There are several situations where incorporation isn’t advisable:
- There could be easier and more cost effective options: for example, selling less profitable investment property rather than transferring it; sharing the investment property ownership with a spouse; leaving your current investment property personally-owned and setting up a new company for further investment property purchases
- The actual cost of transfer isn’t justified compared to the tax saved
- If your portfolio is too small or it isn’t particularly profitable
Further Reading On This Investment Property Issue
Turning Your Business Into A Company To Avoid The Changes To The Mortgage Interest Tax Relief Rules
This is an excellent report from the Residential Landlords Association on the pros and cons of incorporation, including a detailed analysis of all the taxation issues. Read the article on Investment Property.
Achieving A Tax-Free And Duty-Free Transfer Of A Buy-To-Let Property Portfolio
Here are a series of replies to a common scenario considering the implications of transferring personally owned investment property to a company. Read the article on Investment Property.
Mortgage Tax Relief Changes Calculator
Hit the next link to download an excel spreadsheet which will enable you to see how you could be affected in the coming years as the tax changes become increasingly more onerous. Download the spreadsheet on Investment Property.
Should Properties Be Owned Personally Or Through A Limited Company?
Hit the next link to download a PDF which neatly compares the question of whether residential investment property should be owned personally or via a company. Download the PDF on Investment Property.
What Should You Do Now?
If you own investment property or you’re considering doing so at some point in the future, you should explore in detail whether you’d be better off with a company owning your investment property, or whether you should own your investment property personally.
It’s pretty clear the decision to move your personally owned investment property into a company isn’t straightforward. As there are so many aspects to consider, it’s vital you seek professional advice from your accountant and your solicitor.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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