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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13915
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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I'M THINKING OF GETTING AN INVESTMENT PROPERTY AND WONDER WHAT

Customer Question

i'M THINKING OF GETTING AN INVESTMENT PROPERTY AND WONDER WHAT WOULD BE MY TAX IMPLICATIONS INVESTING UNDER MY OWN NAME VS UNDER LIMITED COMPANY
Which way is financially more benefiting?
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.
Hi Thanks for your question - I am Sam and I am one of the Uk tax experts here on Just Answer (ex HMRC and now own my own accountancy business) What rental income do you think you will generate - and what is your other annual income position and will the limited company use the property within the business trade - or are you proposing just having the limited company own the property and thats its only incomeThanks Sam
Customer: replied 1 year ago.
Hi Sam, nice to meet you.Gross rental income would vary depending on how many properties I would buy but let's say from £7,800 owning one to £15,600 owning two.My Salary is currently at £39K and I will continue working but I thought that it would be great owning a limited company to reduce tax payments as the main purpose would be to invest and reinvest from profits (if any).My main concern is new legislation and how it would affect my personal circumstance..hence asking your advise and need to understand what tax liabilities I would have one way or another.Best,
Customer: replied 1 year ago.
may I add that net numbers of those would be £1400-5000 (after deducting mortgage costs, expenses, ground rent, agency fees etc)
Expert:  Sam replied 1 year ago.
Hi Thanks for your response and the additional information Ok the main issue we would have here is that a limited company has to operate as a trade and rental income (in the true sense) does not constitute trade income so unless you were to offer additional services or just operate the maintenance side of the properties through the limited company then this will come under scrutiny from HMRC or these would be need to be furnished holiday lets - or B & Bs - so there is a trade element to them. Plus you may find it difficult to raise a mortgage/loan through a brand new limited company and then you will pay 21% corporation tax on the rental income and also be subjected to PAYE on drawing this out as a salary - which then (as things stand) come into potential higher rates. Plus when you sell you have no capital gain exemption allowances as any gain is also liable to corporation tax. So this is not as cost effective as you may think - and the main issue of this limited company just owing property which HMRC would not accept. But the attraction as I see it is that you can defer drawing money out until such time you needed the income and also would have the benefit of drawing dividends which also are cost effective.BUT the cost also of accountancy fees with limited companies does more than wipe out the savings to be had ... So thats the limited company position HMRC stance of limited company and investment propertyn investment activity/businessAn investment activity or business tends not to have the same advantages for tax as a trading one.A company that is in the business of holding and passively managing investments is taxed as an "investment business". The key feature is that for tax the allowable expenses will be limited to those required for investment management. This type of company will be taxed at main tax rates if it is a close investment holding company(CIHC). This is not such an issue since the main corporation tax rate has reduced over the years.A business of holding land and property for rental is described by ITTOIA 2005 as a "property rental business". This description is slightly misleading.A property rental business is not regarded as a business for the purposes of IHT business property relief and most CGT business asset relief (whether run via a sole trader, partnership or company): it is regarded as the holding and managing of investments.A property business will only be treated as a business for the purposes of IHT and CGT relief when it is actively managed and services are provided which are more than incidental to the letting activity.So you could find HMRC override and charge you at normal taxation rates - so just be aware. But if you own them personally - then all rents are liable to tax - and at this time this would see some of the rental income being liable to higher rate tax - but in these early years with a buy to let loan (interest only) and the other expenses you may just break even - thereby only creating true profits once the loan has been repaid. And if you had a spouse/partner or children over 18 you could put the properties in joint names thereby splitting the income and also creating an entitlement to the capital gains annual exemption allowance on sale of the properties in the future. Accountancy costs are low - and all expenses are allowable at full capacity.So you could find HMRC override and charge you at normal taxation rates - so just be aware. Thats the facts and whilst I would urge you to remain as a personal investor, at least you know what you are signing up for if you go down the limited company route !And with the changes afoot as an additional charge arising on stamp duty which will apply whichever route you take and of course the other issue is the flat rate of interest allowable being restricted to 20% - which again will affect both the personal ownership position as well as limited company - so neither direction will benefit you avoiding these proposed changes.Do let me know if I can be of any further assistance ThanksSam
Expert:  Sam replied 1 year ago.
Hi
Do let me know if you require any further assistance
Thanks
Sam