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When considering property investments, one crucial decision is whether to buy the property through a limited company or as an individual. Each option has distinct tax implications, benefits, and drawbacks. Understanding these differences can help investors make informed decisions that align with their financial goals.
Buying Property Through a Limited Company
Purchasing property through a limited company is increasingly popular, particularly among landlords with multiple properties. Here’s how taxation works for properties bought this way:
Corporation Tax: When a limited company earns rental income, it pays Corporation Tax on its profits. As of the 2024 tax year, the Corporation Tax rate is 19-25% (depending on taxable profit amoun). This is often lower than the higher income tax rates that individuals might pay on rental income.
Mortgage Interest Relief: A significant advantage of buying property through a limited company is the ability to fully deduct mortgage interest from rental income before calculating tax. This can result in substantial tax savings compared to individual ownership.
Dividend Tax: If the company distributes profits to shareholders as dividends, these dividends are subject to Dividend Tax. The rates for Dividend Tax vary depending on an individual’s income level, but the first £2,000 of dividends are tax-free as of the current tax rules.
Example for Limited Company: John and Sarah run a property investment company. They purchase a rental property for £300,000. The annual rental income is £24,000, and the mortgage interest amounts to £8,000 per year.
Rental income: £24,000
Mortgage interest deduction: £8,000
Taxable profit: £16,000
The company pays Corporation Tax on the £16,000 profit at 25% (if company's taxable profit is more than £250,000), resulting in a tax bill of £4,000. If John and Sarah decide to distribute the remaining profit as dividends, they will then be subject to Dividend Tax on this income.
Finally, it is essential to recognize that this approach to purchasing real estate may involve additional accounting costs.
Buying Property as an Individual
Purchasing property as an individual has different tax implications, which can be advantageous or disadvantageous depending on one’s financial situation.
Income Tax: Individuals must pay income tax on rental income. The rates are based on the individual's total income, with the higher rates being 40% or 45% for higher earners. Basic rate taxpayers pay 20%.
Mortgage Interest Relief: Since April 2020, individual landlords can no longer fully deduct mortgage interest from rental income. Instead, they receive a 20% tax credit on the interest payments, which can be less beneficial, especially for higher-rate taxpayers.
Capital Gains Tax (CGT): When an individual sells a property, they are subject to CGT on the profit. For property sales, the CGT rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Example for Individual: Emma buys a rental property for £200,000 with an annual rental income of £15,000 and annual mortgage interest of £5,000.
Rental income: £15,000
Mortgage interest: £5,000
Taxable income: £15,000 (with a 20% tax credit on the £5,000 mortgage interest)
If Emma is a higher-rate taxpayer, she will pay 40% income tax on the £15,000 rental income, equating to £6,000. However, she gets a 20% tax credit on the £5,000 interest, reducing her tax liability by £1,000. Her total tax bill is £5,000.
Check out our previous article on property-related personal taxation here.
For more, please visit GOV.UK .
© 2024 UPECO LTD
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ATTENTION!
This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.
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