Could you increase property investment profits as a limited company?

Brett Alegre-Wood
May 21, 2018

Tax is changing the landscape for UK property investment – are you prepared?

It used to be that most property investment profits was made by individual investors in their personal name. Very few people would set up as a limited company to buy and hold residential investment property.

Since 2016, an increasing number of investors have chosen to invest in property as limited companies because of investment profits. In this article, you’ll learn why its now not only in vogue but very sensible for many. The Financial Times reported that it is now ‘the norm’ for buy-to-let investors to set up as limited companies. Perhaps it’s how you should be investing in property?

What happened in 2016 to shift structure of property investment?

In its infinite wisdom, in 2016 the government changed the way that mortgage interest is dealt with by property investors because of investment profits. The new rules started to take effect in 2017, and are being phased in. They will be in full swing by 2020. This means that from 2020/21, you won’t be able to deduct your mortgage interest costs from your rental income when calculating the income tax that you owe. In addition, the tax deduction you can make will be limited to the basic rate.

Under the old system, if you earned £10,000 in rental income, paid mortgage interest of £4,000 and incurred other costs of £1,000, you were left with a taxable income (profit) of £5,000. If you paid income tax at the higher rate (40%), you would be liable to income tax of £2,000.

When the new rules take their full effect, you won’t be able to deduct the mortgage interest from your rental income to calculate your investment profits. So, your net income will be £9,000. As a higher rate taxpayer, you’ll incur a tax liability of £3,600. You can then claim tax relief at 20% on your mortgage interest payments of £5,000. So, your £3,600 tax bill is reduced by £1,000. The tax you pay is £2,600.

In these examples:

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  • Before 2017, you would’ve made £3,000 investment profits having paid £2,000 income tax
  • After 2020, you will make £2,400 investment profits having paid £2,600 income tax

You could get pulled into a higher rate tax bracket because of investment profits

For basic rate taxpayers, the investment profits you make will be unchanged. However, because your gross profit is higher (in our example, £9,000 instead of £4,000, because mortgage interest payments are no longer deducted), you could end up moving into the higher rate tax bracket. If this is the case, you’ll suffer the same tax hit on your profits as a higher rate taxpayer.

How does investing as a limited company help in investment profits?

There are three reasons you might decide to invest as a limited company instead of in your personal name(s):

1.      How your rental income is taxed

Instead of being treated as personal earnings, your property investment profits after costs are treated as corporate investment profits. This means they will be taxed at the corporation tax rate, which is now 19% and is reducing to 17% in 2020. This is a marginal benefit for basic rate taxpayers, but more than halves the tax liability for a higher rate and additional rate taxpayers.

2.      How your mortgage interest payments are treated

As a limited company, mortgage interest payments are considered as a cost of running the business. So, you get to deduct them from your gross property investment profits. In 2020, this means that our example property investment would produce:

  • £10,000 rental income
  • £4,000 mortgage interest costs
  • £1,000 other costs
  • £5,000 profit

This property investment profits would be taxed at 17%, with a tax liability of £850 – a net profit of £4,150, versus the net profit of £2,400 when invested as a personal investor.

There is also a degree of flexibility should you want to withdraw this property investment profits. For example:

  • You could take it as dividends (though this may incur a tax bill – see below)
  • Distribute it among company shareholders (family members, perhaps)
  • Use the profits to fund your next property investment

3.      Inheritance tax in a limited company

You could set up the company to mitigate inheritance tax, using various trust structures or different types of shares. If your plan is to leave a sizeable property portfolio to your loved ones, this could be another compelling reason to invest as a limited company.

Sign me up! I want to invest as a limited company!

Woah, hold your horses. Before you rush to invest in property as a limited company or transfer your current property portfolio under a company umbrella, it’s not all plain sailing. There are other factors that you should consider first, including:

  • Mortgages may be more difficult to secure (which is why you should use a mortgage broker).
  • You may be taxed on the dividends you take – the first £2,000 (per person) is tax-free, but then dividend income is taxed with your other income. This could mean paying more tax than you would as an individual investor.
  • The cost of setting up and running a limited company – there’s more paperwork, and you’ll need an accountant to keep your company accounts.

Should you invest as a limited company for the sake of investment profits?

There are definite advantages of investing in property as a limited company:

  • especially if you are a higher rate taxpayer now or expect to be in the future; or
  • if you own a portfolio of properties or are building one, a limited company could give you extra flexibility; or
  • if you expect to buy and sell properties, your profits will be taxed as corporate profits rather than capital gains – and that could reduce your tax liability.

However, whether you should do so or not depends upon your individual circumstances. It’s been estimated that as much as 80% of buy-to-let property investment in the UK is now made as limited companies. Savvy investors will take specific advice before deciding how to invest.

Whether you currently own investment property personally or are considering investing, you should review how to invest. Doing it via a limited company could save you a lot of money each year – perhaps thousands – and propel you towards your lifestyle objectives faster.

Contact Gladfish today on +44 207 923 6100 and book a strategy consultation. Together, we’ll assess your current financial position and investigate how your property investment should best be structured.

Live with passion and fun,

Brett Alegre-Wood


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