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|
|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.