Good morning guys, I hope you all had a constructive week. This week we will be discussing property and taxation. In 2015 it was the then chancellor George Osbourne that came up with an idea that he was not going to allow investors/landlords who bought properties in their own names to offset mortgage interest when calculating the profit that they would be making from their buy to let properties for the purposes of calculating their income tax. That moment the whole tax planning landscape had changed. The received wisdom became that whereas before buy to lets should be in ones own name because whenever you need to sell you can take advantage of capital gains tax and sell under your own name. However as you are aware it is now advised to do so through a limited company. Unfortunately it is not based on a different method for each strategy, regardless of strategy it is advised that it should be done through a limited company. Of course, there are exceptions to that as it may be that your own personal circumstances mean that it is not that much of an issue. In theory this would only affect a higher rate tax payer and if you’re a lower rate tax payer it may not affect you as much. Having said that you should speak with your accountant as it could be the mere fact you own a property and the changes to the legislation could push you to the higher tax bracket.

 

However for most of us the most appropriate method would be to undertake our business through a limited company. The advantage of using a limited company at the moment as things stand you can off set all your mortgage interest when calculating corporation tax and alleviating it from the profit. However as we all know this may be changing. So we will have to evaluate our loan to value ratios to ensure that we have more equity in our properties to not allow us to be too affected by the changes to mortgage payments no longer being considered as an expense. There are disadvantages to having a limited company of course, whereas before if it was in your name you would be able to access the funds.

 

However with a limited company it is not quite straight forward because the money actually belongs to the company and the company is a separate entity to you. Therefore there is only 2 or 3 ways to take money out of a company firstly by taking a dividends, second is a salary and thirdly through a loan. Let’s take those in reverse order regarding the loan, you are able to take a loan but your company would have to charge you a commercial rate of interest and you have to pay it back at some point otherwise HMRC will start their investigations. You can also pay yourself a salary but the issue is you would be charged income tax. Additionally with regards to dividends there are methods of doing so but the amounts the government are allowing to take out is reducing from £5,000 to £3,000 but you can only take a dividend if the company is taking a profit. You may be asking what is the problem in that surely we want our companies to make a profit? But do we because when you consider the costs of refurbing the property and doing all the repairs it is highly likely if not probable at some point your limited company may be making a loss. Therefore for tax purposes it may be healthy as you would not be paying corporation tax but if that is the case you would not be able to pay yourself a dividend so you can only pay yourself a salary which will involve paying income tax. The benefit of making a tax loss is that the loss can be carried forward so if you do make a profit in the future your taxable profit for that year would be reduced to account for the loss that you had in your previous year as rental and capital gains profits all comes under corporation tax.

 

Therefore in essence there is no ideal solution but at the moment we have to make the most of the tax planning changes taking place for each one of us. Therefore make sure you continue to have a detailed conversation with your accountants on ways forward and methods that would work best for your circumstances as each of us are different.

Best of Luck!