BTL Personal vs Ltd Company – Which way to jump?

BTL Personal vs Ltd Company – Which way to jump?

16:18 PM, 7th December 2020, About 8 months ago 20

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Hello, I have a question re Section 24 BTL on personal vs Ltd Co. Having been a landlord for nearly 10 years now, I understand the practical tax issues that come with section 24 changes and I completely agree with Mark & Mark’s smart company structure in the long term. This would also imply that any future BTL investments (buy to rent and hold rather than development) be made in a LTD company.

However, facing a situation at the moment, I am wondering if it’s always advantageous to go Ltd co route. If I am buying a say £400k property at 75% LTV, implying a £300k mortgage. BTL co rate would be approximately 4% pa but personal BTL rate would be 2% and be about £2k cheaper to secure the mortgage.

Taking into account even the highest rate band mortgage relief “lost” under s24 would still mean that the personal mortgage is far cheaper.

I get that going the Ltd co route also opens up other benefits such as CGT and IHT planning but if a landlord has a relatively small portfolio of <10 properties, is already a highest rate taxpayer and mortgage rates are super cheap, there must be a tipping point where the Ltd co is not always the best answer. If I were to purchase in a personal name, then what stops us going down the Mark @ Cotswold strategy down the track when the mortgage rates are more favourable (or the properties are mortgage-free) of switching into a Ltd co?

Am I missing something in my maths in the example presented?

Unglamorous Landlord

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Comments

by Neil Patterson

16:36 PM, 7th December 2020, About 8 months ago

Mark Alexander commented:

"Whilst borrowing in your own name to acquire properties, using personal buy-to-let mortgages, might result in greater availability of mortgage products as well as lower rates of interest, but only if you invest into flats and houses and you are UK resident. The interest rates for non-residents, HMO’s and semi commercial properties is very similar whether you borrow in your personal name or through a company. Furthermore, personal ownership has longer term taxation consequences which could prove to be detrimental to your objectives in the longer term. These include:

• Income tax on profits at your marginal rate
• Up to 28% capital gains tax when properties are sold (currently under review with proposals to match the UK marginal income tax rates)
• 40% inheritance tax on capital growth
• The inability to offset finance costs against rental income, particularly for residential property letting.

Given that property investment is a long term strategy it often pays to ‘play the long game’ as opposed to taking a short term view."

by Neil Patterson

16:37 PM, 7th December 2020, About 8 months ago

Please see the video added to the above article

by Darren Peters

12:17 PM, 8th December 2020, About 8 months ago

While the choice ultimately depends upon your goals, Ltd Co would give you a lot of flexibility that you don't have owning in your own name as demonstrated in video above. This flexibility might be very handy when the govt increases taxes everywhere.

In essence in your own name your only choices are to spend money on repairs or divert some into a pension, the rest is taxed at whatever rate.

In a LtdCo
1) You can extract money as salary, dividend, loan interest, loan capital or any combination that's most tax efficient.

2) You can divert money into your (now director's) pension up to £40K per year and if you have an existing pension that you haven't paid into recently, backdate that for the previous 2 years, Ie up to 120K.

2a Transfer this pension money to a SSAS and lend back to your company at a commercial rate and the interest charged goes into your pension as a cost to your business. This is a whole other topic in itself.

3) if you buy a £200K property in your own name with a £50K deposit and £150K mortgage, your £50K is tied up until you remortgage. If you buy through a new company, you would have to lend that £50K to the company since it has no capital but as the company starts to make money you can start to take that £50K of capital back at a time of your choosing. So you could extract a combination of salary, dividend, interest and capital.

Eg if you are on £50K per year but next year you need £55K you could pay down 5K of the £50K loan and stay within the 20% tax bracket. It's not easy to extract bits of your deposit from the property when it's in your own name. Remortgage depends on increase in property value, time and has costs associated.

You are a lender to your company and can then charge your company interest on the £50K. Interest is treated differently to salaried income.

by Mark Alexander

12:22 PM, 8th December 2020, About 8 months ago

Reply to the comment left by Darren Peters at 08/12/2020 - 12:17
Good points Darren ...

It is possible for company owners to take £20,500 tax free from their limited company!

You can do this by using the following allowances and bands to your advantage.

• Personal allowance (PA): £12,500 – all income within this allowance is tax free

• Savings rate band (SRB): £5,000 - interest taxed at 0%

• Personal savings allowance (PSA): £1,000 - interest taxed at 0%

• Dividend allowance (DA): £2,000 - dividends taxed at 0%

Therefore, if you had a Directors’ loan account with a balance of £185,000 an annual interest rate of 10% should be acceptable with HMRC allowing you to receive £18,500 of interest income entirely tax free. This would be an allowable expense to your company saving corporation tax at 19% and you would also be able to receive it personally without any tax.

On top of this you can take £2,000 in dividends from the company personally without paying any income tax. Do remember that dividends are paid post-tax and as such your company will have already paid 19% corporation tax on this element of income.

If your directors’ loan account balance is not large enough to charge such as high rate of interest, you may be just as well off by taking a small salary of around £9,500 and receiving additional income from a mixture of interest and dividends as above.

Also, as you say, if the company has more cash available you can use that money to repay Directors loans, which are not taxed either.

Last but not least, you could decide to live abroad and pay not UK tax on UK dividend income. You would pay tax in your country of residence, but if you choose wisely there might be none payable. An example of this is if you are NHR resident in Portugal you don't pay tax on UK dividends in the UK or in Portugal for the first 10 years!

by John Spring

21:11 PM, 8th December 2020, About 8 months ago

With reference to the above example if I loan £50,000 to a new limited company in order for it to be used as a deposit to purchase a buy to let property is the repayment of my loan pre or post corporation tax ???

by BHLandlord

22:12 PM, 8th December 2020, About 8 months ago

Hello all - these are all superb points. Darren, I completely agree with you re the advantages of the company route. In fact some of our portfolio is already in the LTD company. Having seen Mark's video, the long term strategy is to push all the personal owned ones into the ltd company.

At the moment, there are deals available due to Covid but the Ltd Co mortgage market for Single let vanilla flats/ houses isnt as competitive as it is on the personal front.

But I get the flexibility point and quite likely that personal name landlords and middle class income earners are likely to be clobbered with changing tax regimes in the next few years.

by Mark Alexander

7:17 AM, 9th December 2020, About 8 months ago

Reply to the comment left by John Spring at 08/12/2020 - 21:11
The repayments come out of post tax profits. Interest is pre-tax.

by paul thomason

8:42 AM, 12th December 2020, About 8 months ago

Reply to the comment left by Mark Alexander at 08/12/2020 - 12:22
Morning mark very interesting what you say , I presume a husband and wife who are directors off company’s or children who are directors each can receive 5000 tax free

by Mark Alexander

8:47 AM, 12th December 2020, About 8 months ago

Reply to the comment left by paul thomason at 12/12/2020 - 08:42
Hi Paul

All adults receive these allowances, they do not need to be Directors of a company to do so.

by paul thomason

9:12 AM, 12th December 2020, About 8 months ago

Thanks mark

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