When you buy a rental property, you have two main options: buy it personally or buy it through a property investment company, also called a Special Purpose Vehicle (SPV). Many property investors today prefer using a company because it can provide tax savings.
Here are five ways an SPVs can help you save on taxes.
What is a Property Investment Company?
Let us first understand personal ownership of properties. If you buy the property yourself, it is in your name. You are personally responsible for the mortgage and pay Income Tax on any profit you make from renting it out.
When a company or SPV owns a property, the mortgage is in the company’s name, and it pays Corporation Tax on its profits. The main difference here is that the Corporation Tax is usually lower than Income Tax for higher-rate taxpayers.
Many Buy-to-Let (BTL) investors use SPVs for tax benefits. Today more than 80% of Buy-to-Let properties are purchased this way.
Due to changes in rules, taxes and high interest rates, rental profits have become harder to maintain. Using a company can help keep costs down, so many investors are switching to company ownership.
Five Ways a Property Investment Company Can Help Save on Taxes
1. Lower Corporation Tax Instead of High Personal Income Tax
If you are a higher-rate taxpayer, Income Tax on rental income can be as high as 40%. By owning property through an SPV, you pay the company tax rate of 19%, which could save you a lot of money.
For Example,
Let us say you rent out a property for £950 per month and pay £600 per month in mortgage interest. After mortgage costs, you make £4,200 in profit each year.
If you own the property yourself, you are taxed on the full rental income (without fully deducting mortgage interest). At 40% tax, your total tax bill would be £4,560, but you get a small tax credit on the mortgage, reducing the tax to £3,120. This leaves you with only £1,080 in profit after tax.
Through an SPV, you can fully deduct mortgage interest, making a taxable profit of £4,200. The company pays 19% Corporation Tax, leaving you with £3,402. This is more than triple what you would keep if you owned the property personally.
Moreover, you could take out £1,000 from the company as a tax-free dividend if you don’t have other dividend income.
2. Full Mortgage Interest Deduction
A big benefit of using an SPV is that it can fully deduct mortgage interest from taxable profit, which lowers the company’s tax bill. When you own property personally, Section 24 limits how much of your mortgage interest you can deduct. Only 20% of mortgage interest can be used to lower your tax bill through a tax credit, which is far less tax-efficient than a full deduction.
3. Save Profits in the Company to Grow Faster
If you plan to reinvest your profits in more properties, you can save up for a new investment faster in an SPV than in personal ownership. This is because your profit is not taxed as heavily in a company, allowing you to save more quickly.
For Example,
Suppose you want to save £15,000 for a new Buy-to-Let property:
- Personal Ownership - With £1,080 profit per year after tax, it would take about 14 years to save £15,000.
- Company Ownership - With £3,402 profit per year after tax, it would only take four and a half years to save the same amount. This difference comes from lower taxes, which leave more money in the company to reinvest.
4. Tax Savings on Dividends for Personal Income
If you want to take profits from the company instead of reinvesting, you can take dividends. Dividends have lower tax rates than regular income. Here is how it works:
- For the first £500 of dividends each year, there is no tax
- Beyond £500, a higher-rate taxpayer pays 32.5% tax on dividends
For Example,
If you withdraw the £3,402 profit from the SPV as dividends, you will pay 32.5% tax on everything above £500, resulting in about £483 in tax. You would be left with around £3,003 after tax.
By comparison, if you owned the property personally, your net profit would be only £1,080. The company setup leaves you with nearly three times more money after tax.
Delve into our article to learn "Buying Property Through a Limited Company- The Pros and Cons" Read Now!
5. Mixing Personal and Company-Owned Properties
If you already own rental properties personally, you might wonder if you can transfer them into an SPV. This is possible, but it means selling the property to the company, which can be expensive because of taxes.
- Capital Gains Tax - If the property’s value has jumped by more than £3,000, you would pay Capital Gains Tax of 24% as a higher-rate taxpayer.
- Stamp Duty - The SPV would also need to pay stamp duty, plus an extra 3% surcharge, when purchasing the property.
Transferring existing properties to an SPV is not always smart due to those costs. However, you can own a mix of properties personally and through a company. For future investments, using an SPV for new purchases lets you enjoy the tax benefits without needing to sell your current properties.
Conclusion
Using a property investment company can help you save a lot on taxes if you are in the higher tax bracket. It allows you to maximise the benefits from your Buy-to-Let investments.
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