It seems like landlords are being inundated with changes surrounding their finances; it’s hard to keep on top of it all. You may have heard murmurings about landlords buying properties within (or transferring properties into) companies so here’s some information on property investment through a company with the helping hand of Kenny Logan of JRW Chartered accountants.
Interest payable
Currently, individual landlords can deduct 100% of the interest they pay on any loans on investment property as a cost. From 6 April 2017, individual landlords will only be able to deduct 75% of their borrowing costs. This will increase by 25% a year each year until April 2020 when all of the interest paid by an individual landlord will be disallowed. Instead, landlords will receive a tax credit equivalent to 20% of the interest to offset against income tax. For landlords who have high mortgages, they could end up paying tax on non-existent ‘profits’. However, this restriction on deducting finance costs won’t apply to companies. One downside to owning properties within a company is that companies may find the can’t secure as good a mortgage deal as an individual or will have to jump through a lot of hoops to secure borrowing.
Tax rates
Individual landlords pay income tax on rental profits at 20%, 40% or 45% after deduction of any personal allowances. When they sell their properties, any gains made are taxed at 18% or 28%. Companies currently pay tax on all profits and gains at 20% but this will drop to 19% on 1st April 2017 (and it is expected it will drop to 17% in 2020). One downside to buying a property in a company is that any profits are not available to spend unless you withdraw these as salary or dividends. Salaries will be taxed under PAYE and may incur National Insurance charges. Likewise dividend tax is due on dividends above £5,000 a year. There are also admin costs relating to running a company (including filing annual reports and accounts).
Long-term planning
Most investors wish to hold properties for the long-term which has big advantages when properties are held in a company;
- A company will generally pay less tax on each property disposal than an individual. The capital gain is reduced for the effect of inflation before the net amount is taxed at 20%
- Profits from the property investment business can roll up within a company after tax is paid at 20% so that the individual can take the money out in the future when they might have a low personal tax rate, perhaps after retirement
- A company can be sold as an active rental business and any gain made is taxed at 20% instead of 28% on gains made by an individual when they sell a portfolio.
- A buyer of a company will save LBTT (Land and Building Transaction Tax) as they will pay 0.5% on the company shares rather than the high rates associated with LBTT
- Shares in a company can be passed on to the next generation more easily than a share in the investment properties
There is an additional ATED (Annual Tax on Enveloped Dwellings) charge associated with properties which are owned by companies and are valued at over £500,000 however most investment properties in Edinburgh will be well below this level (many of our investors concentrate their efforts on properties around the £100-200k mark or around £300-400k).
This is just a wee taster on property investment through a company. If you would like to speak to the experts, JRW Chartered Accountants are based at 5 Castle Terrace, Edinburgh or give Kenny Logan a call on 0131 322 1860 or email him at [email protected]. If you’re considering making a property investment and don’t know where to start just contact [email protected] and Chris, our investment guru will give you some pointers and explain how we can help.