Until 2017, most landlords held property in their own name. It was beneficial for larger landlords, but for most individuals it was not worth the time or cost. It was better for landlords to own buy to let property in their own name.
Section 24
This changed, when Section 24 was introduced in April 2017. It changed tax laws for landlords who owned property in their own name. These landlords can no longer claim mortgage interest, or any other property finance, as tax deductible.
Instead, Landlords are pay tax on their rental profits without deducting interest costs. Landlords can then claim tax relief on up to 20% of their interest expenses against their income tax liability.
What did Section 24 mean for landlords?
The impact on those landlords who own properties in their own name is huge. It creates the ridiculous scenario where a landlord can make a net loss and then be taxed on their loss.
However, Section 24 does not apply to companies that buy property. They can claim 100% of their interest expenses and finance costs. They then pay corporation tax on their net income.
Section 24 has had a financially devastating impact on most people who own property in their own name. Perhaps except for offshore landlords who are less impacted by Section 24.
Landlords were aware of the impact Section 24 would have, and they have had time to adjust by lowering their leverage to lessen the impact, re-financing and locking-in long term rates or both.
However, many landlords simply sold up in 2021 and 2022. Taking advantage of favorable market conditions, they have sold at the top of the market, cashed in and moved on.
Owning property as a Limited Company.
For people who already owned buy to let property in their own name, there was little incentive to simply switch ownership into a Limited Company. That’s because, by changing to a Limited Company, your’re changing the ownership of the property you then create tax events.
The first cost consideration is Capital Gains Tax (CGT). CGT is a tax that is levied on the difference between the sale price of an asset and its original purchase price. This is payable by the landlord selling the property.
Secondly stamp duty will be payable by the Limited Company when it purchases the property.
In addition to CGT and Stamp Duty, there will also be other legal fees associated with the ‘sale’ to the Limited Company.
So whilst transferring existing investment property into a Limited Company generally isn’t financially viable, it can be advantages for new purchases. (If you’re thinking about buying in the UK, check out our Investors Guide to the UK here).
Advantages of owning a new investment property as a Limited Company
UK Investors
If you’re an investor who buys a rental property in the UK who is living and working in UK and you use a company to buy the property. You will pay a 3% SDLT surcharge and the 19% corporation tax on the net profit of their company.
If they retain all these profits within your company and use them to grow your portfolio. You can then use the retained and future profits to pay yourself dividends for which they will pay the following tax (assuming it is their only income).
You won’t pay any income tax on their first £12,570 in dividends ie. Your tax free threshold. Then you will pay the following dividend taxes.
| Dividend Tax Rate | From | To | |
| Basic Rate | 8.75% | £2,000 | £37,500 |
| Higher Rate | 33.75% | £37,701 | £150,000 |
| Additional Rate | 39.35% | £150,000 + |
International Investors
An international investor will pay the same corporation taxes on the income above. However, assuming they are offshore they will pay no dividend tax in the UK. In addition, many won’t pay tax on their dividend income because foreign income is not taxed.
Owning property as a Limited Company carries obligations. These include setting up a UK Limited Company, register with Companies House, set up the company structure and open a bank account. You’ll need a company secretary and be able to manage the bookkeeping, tax returns and need a registered office address. This sounds onerous but it is relatively straightforward and there are businesses who will manage and arrange this on your behalf, for a fee.
Is it better for landlords to own property as a Limited Company?
In short, the answer is yes, for most investors buying a new property, it will generally be more tax efficient to do so as a Limited Company. For those who already own investment property in their own name, it is probably not financial viable to create a Limited Company to own property you already own.
Tax is complex issue. So, it’s always important to get independt specialist advice before buying an investment property as an individual or Limited Company.
If you’re considering buying a new investment property and want to compare the expected return AFTER TAX of property bought by an individual or a company, check out www.myproptech.com.
You’ll be able forecast the returns, compare properties and compare structures to work out what’s right for you.
