Another frequent question that is asked amongst property investors and comes up regularly at The Property Investors Crash Course is whether it is best to buy property in one’s own name or to buy using a limited company. On today’s episode #43 Russell Leeds and Alasdair Cunningham share their knowledge of the subject.
The discussion highlights the complicated nature of the question as there is no clear cut answer. The big discerning factor lies in what kind of property investment an individual plans to carry out. If an individual’s goal is to buy to flip ie, Buy, Refurbish, Refinance, it almost always makes sense to buy through a limited company. This is for the simple fact of TAX. When buying through a limited company you are charged a flat rate of corporation tax (19% at the time of filming). As an individual, even in the lowest tax bracket this tax increases to 20% and rises again to 40% or even 55% for those on a higher income. Thus buying through a limited company saves an investor large amounts of money.
Today, most property investors are buying to keep. They seek to earn their money through schemes such as R2R, rent to rent or HMO, House of multiple occupancy. Again the question still remains complicated and today’s discussions flows on to highlight the pros and cons of investing using a limited company.
The pros are as follows:-
- Again an investors pays less tax on the rental income they receive, as they are charged corporation tax as opposed to income tax.
- The new law coming into effect in 2020 states that a landlord that owns property in their own name can no longer claim the mortgage interest paid, as a tax deductible expense. This has had, and will continue to have a great effect in the property world. Many long term and seasoned landlords are now selling their vast portfolios of property, owned in their own names, as the new law will change properties that have been making small profit into properties that will be making considerable losses. Mortgage interest paid by a limited company will continue to be able to be claimed back as a tax deductible expense.
There are also cons to buying property through a limited company:-
- Mortgage rates are higher than that of personal mortgages.
- If an individual plans to use the money made from these properties as their main source of income they will then be taxed twice. (corporation tax through their limited company and income tax once they take it as a salary). However if the individual plans to save the money and invest further this double tax would not be the case.
- Running costs, there are running costs such as setting up a company and accounts etc.
In summary, there are three key questions to ask in order to find the answer for each individual investor.
- What will the money be used for?
- How will the income affect their current personal tax affairs?
- How much property does an individual want to buy?
For example, if an investor plans to create a passive income and live off of the money as their only source of income, owning only two properties, it would make sense for this investors to buy as an individual. However, if another investor was earning fifty thousand a year and wanted to build a large portfolio and invest the money made, it would be more profitable for them to buy through a limited company.