Introduction
Investing in property through a limited company has become an increasingly popular strategy for landlords in the United Kingdom. This rise in popularity is largely due to changes in tax regulations, specifically those outlined in Section 24 of the Finance (No. 2) Act 2015, which have made personal ownership less financially attractive in some cases. In this article, we will explore the key benefits of this approach, focusing on tax efficiencies related to mortgage interest deductions and other financial advantages.
What is Section 24?
Section 24, often referred to as the "landlord tax grab," refers to changes in tax law that phased out the ability for landlords to deduct all of their mortgage interest and other finance costs from their rental income before calculating their tax bill. Since April 2020, landlords can no longer deduct mortgage expenses from rental income. Instead, they receive a tax credit based on 20% of their mortgage interest payments, which can result in higher tax liabilities, especially for higher-rate taxpayers.
Benefits of Company Ownership
1. Full Mortgage Interest Deductibility
One of the most significant advantages of holding property through a company is the ability to fully deduct mortgage interest from rental income. Unlike personal landlords affected by Section 24, a limited company can still deduct the full cost of the mortgage interest and other financial costs associated with property management before it calculates its profit tax.
This ability significantly reduces the overall taxable income of the business, potentially resulting in lower corporate tax liabilities compared to personal tax liabilities under the new Section 24 rules.
2. Lower Tax Rates on Profits
Corporations in the UK are subject to Corporation Tax, which is generally lower than the higher personal income tax rates. As of the current tax year, the Corporation Tax rate starts at 19%, which is considerably less than the higher personal tax rates of 40-45%. This can represent substantial savings, particularly for landlords who would otherwise be taxed at the higher or additional rate on their rental incomes.
3. Potential for Tax-Efficient Profit Extraction
Operating through a limited company offers various methods for tax-efficient profit extraction. For example, shareholders (often the property owners themselves) can draw dividends, which are taxed at lower rates than income and only if the individual's total income exceeds the higher rate threshold. Additionally, employing family members and paying them a salary for legitimate work can also be an effective way to reduce taxable income.
4. Inheritance Tax Benefits
Holding property within a company can offer significant benefits in terms of inheritance tax planning. Shares in a property investment company might be able to benefit from Business Relief (BR), which can reduce the value of the shares transferred as part of an estate for inheritance tax purposes.
5. Greater Flexibility in Financing
Companies may find it easier to raise finance than individual landlords. This is because lending to a company can be secured against the assets of the company, providing lenders with an added layer of security and potentially better rates.
6. Streamlined Management and Ownership
Owning property through a company can simplify ownership structures, especially when dealing with multiple investors or properties. A clear, corporate structure can make it easier to manage properties, share profits, and transfer ownership stakes without complex legal transfers required in personal ownership.
Conclusion
The decision to invest in property through a limited company has a host of benefits, primarily driven by favourable tax treatments such as full mortgage interest deductibility and lower corporation tax rates.
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