How to make Property Investments more Tax Efficient

Property investing is far more difficult than it ever was. Many property investors have experienced a decline in rental income due to increased regulation, changes in stamp duty, and reduced tax relief. An increasing number of investors are choosing to purchase real estate through limited companies to avoid these challenges.

Although owning your own real estate business isn’t for everyone, it’s a worthwhile alternative to think about if you’re thinking about making a buy-to-let investment. Correctly structuring your company could have a significant impact on the total tax you pay.

Personally owned properties

Generally speaking, taxes on individually held property are simple to calculate. You take your permitted outlays and subtract them from your rental income to get the profit, which is then subject to income tax at your regular rate. For homes that you directly own, you are not allowed to deduct your mortgage interest as a cost. Rather, any mortgage interest payments and other financing charges are now deducted from your tax liability at a baseline rate of 20%. For taxpayers with higher and additional rates, this is not good news, and it means they will have to pay more tax.

Limited company owned properties

The taxation of properties owned by limited corporations differs significantly and offers greater flexibility. Once more, to determine the company profits, you subtract the authorised expenses from the rental income. All of the mortgage interest, however, is tax deductible and will lower the profit, which lowers the amount of taxes owned. Then, instead of paying income tax on the profits, corporate tax is paid. You won’t have to pay any further taxes if you retain profit within the business.

There are 3 primary ways to remove profit from your business and pay yourself personally: pension payments, dividends, and salary. Each of these options is subject to a different tax rate.

Private Landlord

Can claim £1,000 tax-free property allowance.

Up to £12,570 annual profits is taxed at 0%

From £12,571 to £50,270 annual profits is taxed at 20%

From £50,271 to £125,140 annual profits is taxed at 40%

Over £125,140 annual profits are taxed at 45%

Limited Company

19% ‘small profits’ rate – annual profits are £50,000 or less

Marginal relief from the government – annual profits between £50,000 and £250,000

25% ‘main rate’ – applied to all profits that annually exceed £250,000

There are many other factors at play when it comes to taxes, though these figures provide property investors with a useful summary. To determine if it is better for you and your objectives to own investment property directly or through a limited company, take the time to carefully consider all the advantages and disadvantages and speak with an expert.

DISCLAIMER

The above article is provided for guidance only and may not cover your personal circumstances so you should not rely on it. It is important that you seek appropriate professional advice which considers your personal circumstances where you can provide the full facts of the case and all documents related to your case.