When purchasing a property for the purpose of earning rental income from it, there are a few ways you can buy it. Two of the main ways is that you can either buy the property personally in your own name or buy it through a property investment business, also known as a special purpose vehicle (SPV).
Using an SVP is a popular way for landlords in the UK to grow their property portfolio.
Investing in a property in the UK has become a lot tougher than it was due to a combination of increased real estate regulations, decreased tax reliefs, and changes to the stamp duty, which means many property investors have seen a reduction in their overall rental revenue. However, in these highly volatile and uncertain times, many people still believe that investing in brick-and-mortar assets is more recession-proof than dabbling in other types of investments.
To tackle these challenges, many investors are using limited companies to buy properties in an attempt to save taxes.
How to Save Tax on Properties
Here are some ways how a property investment business can save income tax.
Paying Corporation Tax
If you are a higher-rate taxpayer and buy a personally-owned property, you will need to pay income tax on the rental income you get. For example, if you are renting out your property at £1000 a month that has a monthly £650 mortgage, you will be making £4,200 profits per year before accounting for tax. You will then have to pay out a hefty income tax at 40%, which will leave you just £1080 of income after tax.
However, you get more savings if you buy a house through a property investment company. When you buy through a company, you will still have to pay tax on your profit, but only corporation tax, not income tax.
This means you will still be making the same amount of gross profit. However, you will be paying only 19% of corporation tax on it, leaving you with well over £3402 pounds of profit after tax.
Section 24 Only Affects Private Buy-to-Let Landlords
If you have decided to buy a property through an investment company, keep in mind that you have a fully allowable mortgage interest, which can reduce your tax bill. However, for people who own the property under their own name, only 20% of the mortgage interest is allowable, which means they will have a higher tax deduction.
Holding Profits Inside an SPV Means Quicker Savings
Consider you want to buy another buy-to-let property, and you need to save £20,000 to do so. If you buy the property under your own name, it will take you about 15 to 20 years to save that much amount if you go by the example we gave above.
However, if you buy the property from your property investment business, it would take you about 5 to 6 years, depending on the exact amount you save from this type of investment. This is a huge difference and highlights how tax-efficient it is to hold your profits in an SPV.
Savings on Dividend Profits
If you don’t intend to buy another property but want to see a good profit anyway, there are ways to do that. As a personally-owned property, your tax has already been deducted, and you are left with only a little more than £1000 per year after tax that you can spend.
However, with a property investment company, the profit does not belong just to you – it belongs to the company, and you have the option to pay yourself a dividend if you want to draw down on it. According to the dividend allowance, the first £2000 of dividends a year are tax-free. After that, you will pay a tax of 32.5% on every dividend over £2000.
Assuming you are a high-rate taxpayer, if you buy the same property through a property investment company, you will only have to pay an income tax of £483, which means you will have a solid profit of £3003, which is way more than the £1080 of profit for owning the property under your own name.
So how can you save more if you have bought a personally owned property? We believe that it is a good thing to have a mixture of both personally-owned and company-owned property as part of your portfolio. If you do not want to sell off your personally-owned property, you can always buy the next property through a public investment company and reap all the tax benefits it offers you.
Need help getting guidance on how to save taxes on your property? Consult our property accountants in London today.