10 Minute ReadLandlords have faced huge tax changes
The UK has gone through some big changes over the past few years, especially when it comes to tax on property which has forced out tonnes of landlords who own big portfolios in their own name.ย
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ย But with increasing regulation, more rules and changing tax rules โ is buy to let really dead or is the industry just being cleaned up? In this post I explore why I bought my first buy to let in an SPV limited company.
Now, thereโs tonnes of pros and cons to buying in a limited company and sadly thereโs no straight answer about what YOU should personally do, it really depends on personal circumstances, your goals among many other thing so the only trusted people who can really advise you is mainly, your accountant.
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In my own opinion โ I think the government are doing the right thing, cleaning up the industry and making landlords adhere to more professional rules, those that donโt follow compliance and regulation will end up falling behind, those who ride the wave will thrive from it as theyโre the ones who provide great quality properties, provide an awesome service to tenants and actually know how to run a serious business.
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For me, buying property in a limited company was a no-brainer for quite a few reasons and Iโll explain why I went down that route.
Tax, Stamp Duty & SPV Limited Companies
So firstly, itโs a blessing and a curse at the same time, but unfortunately Iโm a higher rate tax payer. This means that I pay the 40% rate of tax on income above the threshold and by the time youโve factored in national insurance and student loan repayments, thatโs well over 50% of my income gone. So if I was to ever have a property project in my own name, instantly any profit is halved which would make growing, incredibly, incredibly hard.ย
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ย Whereas, if I put the properties into a limited company because I donโt need to draw out the money as salary or income and instead I want to re-invest the profits in the future, it means that I can leave that profit within the company and itโs taxed at 19% which is corporation tax, no national insurance, no student loans.ย
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So Iโve gone from 50+% down to 19% instantly saving me 30% on my profits.ย
Expenses & Corporation Tax
But thatโs not all, within a company, there are tonnes of expenses you can put into the company to minimise your profits, itโs all perfectly above board and every company does it, if you havenโt read Rich Dad Poor Dad which explains all about paying yourself first โ then I highly recommend reading that to understand this next bit.ย
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ย Whether itโs paying for the solicitors, driving up and down the country for viewings, buying equipment to use like a Milawaukee drill set, all of these are expenses in the business which means that I can spend that money before itโs taxed and it reduces my profits.
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So if I made ยฃ1000 profit, and spent ยฃ300 on a drill set, I only pay corporation tax on ยฃ700. Where as if it was in your own name, your savings are already post tax, post national insurance so spending ยฃ300 on a drill set with your post-tax savings means that youโre not doing yourself any favours.ย
SPV Limited Company Stamp Duty
Unfortunately, youโll still need to pay stamp duty โ thereโs no escaping it! Naturally any property thatโs bought through a limited company will be subject to the normal stamp duty rate + the 3% surcharge.
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Even if youโre a first time buyer but decided to buy your first property as an investment in a limited company SPV โ because itโs in a company, you will not get any discounts, in fact you pay extra due to the surcharge.ย
Mortgage Interest Relief
And then when it comes to things like mortgage interest, in the good old days, landlords with property in in their own name could claim the mortgage interest as a deductible expense, thus making it more tax efficient.ย
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Meaning if youโre paying ยฃ200 a month on interest, any profits in the company are reduced by this amount every month meaning you pay no tax, so lets say you made ยฃ200 profit a month โ you basically pay no tax.ย
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But over the past few years, the government have been phasing out buy-to-let tax relief to the point where you can only get a 20% tax relief on your rental income. The rest of it you pay tax on.
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But with a limited company โ I can still deduct the interest payments as an expense in the business meaning I can take that off the profits and pay no tax on it.
Limited Company SPV Costs
But โ I hear you say, limited companies are expensive, the products cost more and worst of all you have to pay an accountant to do your books. All very true points and this is where you need to assess your goals and what you want.ย
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IF you just want the one property for a nest egg when you retire, then actually โ in your own name might actually be a better solution, again an accountant will help you work out whatโs best for you.
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But even when youโre paying accountancy costs and a higher interest rate on the mortgage with higher product fees โ by re-investing the profits and growing your portfolio within the company, the first property might not feel that profitable but as you add more properties, it really starts to compound, and the benefit for me is that Iโm not paying over 50% in tax and NI on the income, instead just paying 19% on minimised profits after Iโve written off the expenses.
For me, I actually have a holding company structure, where I own the holding company, and the holding company owns my actual SPV or limited company that owns the property.ย
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This way, it means that I can set up other businesses and move up profits through dividends tax free from limited company to limited company (rather than paying myself dividends and paying tax on them) and then I can loan money from the holding company, into the property company which can be paid back with interest โ which again is another tax deductible expensive โ and because the money is loaned, it also has to be repaid back into the holding company tax free as before because youโve already paid tax on it.
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It also means, as I make money through youtube, teaching classes on skillshare, my property deal analyser, I also roll all of the profits from these, into the hold co, which will then be loaned into property for my next purchase.
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And in the future, if I want to create a development company or a joint venture, it means that I can set that up as a subsidiary of my holding company and when the joint partner wants to sell the project, close it up or move on โ rather than taking the profits and paying tonnes of tax, instead it goes into the holding company ready to invest back into my own property companies.
Limited Company SPV Conclusion
In conclusion, investing through a limited company is extremely beneficial to me, itโll help me grow quicker, it means I can work on multiple businesses and move the profits around more tax efficiently and ultimately get myself into the business full time, sooner rather than later.ย
Free Goal Setting Guide
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