Should you operate your residential property business through a limited company?
Until recently there was little incentive to own a buy-to-let property through a limited company, however the new restrictions on interest start to bite in 2017-18 with their full force being felt in 2020-21.
If we look at the year 2020-21 only and ignore the transition period it is possible to compare the after tax receipts under different scenarios. We have chosen four profit bands and the options of:
- Keeping the property yourself;
- Transferring the property to a company and taking all the profit out as a dividend; and
- Transferring the property to a company and leaving the profits in the company.
In order to keep things a little simpler we have also assumed that the tax-free dividend allowance is not available to any of the taxpayers. As a reminder the basic rate of tax is 20%, the higher rate 40% and the additional rate is 45%.
The after tax receipts are:
| Rent before interest | £15,000 | £30,000 | £60,000 | £90,000 |
| Interest | £(5,000) | £(10,000) | £(20,000) | £(30,000) |
| Profit | £10,000 | £20,000 | £40,000 | £60,000 |
| Property owner | ||||
| Individual basic rate payer | £8,000 | £16,000 | N/A | N/A |
| Individual higher rate payer | £5,000 | £10,000 | £20,000 | £30,000 |
| Individual additional rate payer | £4,250 | £8,500 | £17,000 | £25,500 |
| Company dividends paid to a basic rate payer | £7,678 | £15,355 | N/A | N/A |
| Company dividends paid to a higher rate payer | £5,603 | £11,205 | £22,410 | £33,615 |
| Company dividends paid to an additional rate payer | £5,138 | £10,275 | £20,551 | £30,826 |
| Company retains the profit, no dividends | £8,300 | £16,600 | £33,200 | £49,800 |
There are substantial tax saving to be made from using a limited company to hold property interests, especially if you are a higher or additional rate taxpayer and you do not need to take dividends. Even when taking all the profits of the company out as a dividend the saving can be substantial.
If you are looking to build a property portfolio, then starting out by using a limited company seems a sensible choice at the present time.
If you already have a buy-to-let property, should you be transferring the property into a company? We will discuss that question in a later blog.
If you need help setting up a limited company or in preparing the tax and accounts for a limited company property letting business, then please give us a call or send us an email.