Can Using a property company save tax for landlords

Can using a property company save tax for landlords?

Generally the answer is usually, yes!

The focus of this piece is to look at the pros and cons of using a property company to save tax – for any new properties that you are buying. (Moving an existing property portfolio into a company structure is different, can be more challenging, and there are other issues to consider. Other blogs we have posted have looked at that rather different situation).

The main plus of being in a property company is that the restriction on interest relief to the basic rate of tax that applies to individuals who hold properties outside a company structure, does not apply within company structures.

As well as getting full tax relief for loan interest and costs, companies can set these costs off against any income or capital gain in the previous year, the year in which they were sustained and even for future years.

So, the big down sides of holding property outside a company structure is that you can only set off interest at the basic rate and you can also only set it off against rental income, not against capital gains and only in the current year.

But there are other advantages of a company structure as well.

A big advantage is that the rate of corporation tax is lower than even the basic rate of income tax. Corporation tax is just 17% from April 2020, (it is 19% now).

Can using a property company save tax for landlords? Some Downsides

Are there any downsides to buying and holding property in a company structure?

Well, for basic rate taxpayers, and looking at income tax rates only, the pluses are limited – as you are only paying 20% tax anyway, so not much difference compared to the corporate rate, and there is less form filling and reporting requirements that a company set up entails.

But here is the problem: Many landlords and property investors who are basic rate taxpayers at present will likely become higher rate taxpayers faster in the future if they don’t use a company.

So, if you are sure you’ll forever be a basic rate taxpayer, then maybe don’t bother. But if you think you might become a higher rate taxpayer in future (either because you will earn more and/ or your property portfolio does well), then a company structure is probably the better bet for you.

But what about the downsides of a company structure?

In a company structure, more tax costs do come up when trying to get funds out (“extracting them” in the jargon) from the company set up. Those on the higher tax rate will pay tax at the rate of 32.5% on any dividends taken out, which take you over the £2,000 limit.

Selling off the portfolio of properties in the company and winding up the company will lead to still more tax. The company will have to pay 17% on any capital gains. Individuals who own the company will also have to pay 20% on the proceeds arising when the company is wound up. Taken together, these two taxes are clearly more than the higher rate of capital gains tax that individuals have to pay, which is 28%. (The rate for basic rate taxpayers holding residential property outside a company structure is 18%).

Another major downside is that the interest rate on company landlord mortgages are always higher. For example, for a 25% deposit company mortgage in Jan 2020, The Mortgage Works are charging 3.34%, compared to only 1.94% for an identical individual buy to let mortgage. (Both have the same fee of £1995). In addition, the legal work for the conveyancing in the case of the company will also be more involved and cost more, due to having to run more legal checks – e.g. Director status and other checks. This could negate a lot of, if not all, the tax savings (Thanks to A Taylor for feedback on this).

Can using a property company save tax for landlords? Downsides of company structure are limited

But most experts think that despite these disadvantages, the fact that folks can deduct interest costs in full and hence reinvest more of their profit and gains within a company, over a long time frame means that they will be able to build up a bigger portfolio. It is this feature that trumps those higher overall tax rates that apply when the company is finally wound up.

Also, where a company owner sells a property, he or she could opt to not extract it, but instead just hold the profit in the company and invest those profits in other sorts of investments, such as shares or bonds – basically building their own portfolio, just like you might have with an ISA or pension.

Until a year ago, property investors in buy to let could cut their capital gains tax bill by carefully selecting properties as their own principal private residence before sale. But changes, which are proposed to apply from April 2020, have effectively wiped out this type of relief (which came from the interaction of Principal Private Residence and Letting Relief).

Sure, individuals who are outside a company structure, still get £12,00 of annual exemption from capital gains tax, but that will be small compensation for many, especially for those whose gains from any disposal will stick them right into the higher rate 28% CGT tax bracket. But do watch out for those niggling, potentially higher mortgage costs as these might negate any savings you make.


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