5 ways to save tax with a property investment company

What is a property investment company?

SPVs

Property investment companies are also known as SPVs or special purpose vehicles, and they're surprisingly common. Over 80% of buy-to-let properties are now purchased via limited companies.

Investing in property is much tougher than it used to be; increased regulation, stamp duty changes and decreasing tax relief and high interest rates mean many property investors have seen a reduction in their rental revenue. However, for many, investing in bricks and mortar still feels like a safe long-term investment.

To combat these new difficulties, many property investors are using a limited company to purchase properties as a strategy to save tax.

5 ways a property investment company can help to save tax

1. Higher-rate tax payers save on income tax by paying corporation tax

A key reason many property investors prefer to purchase properties in a limited company is due to the flexibility a limited company offers. This includes things like: claiming mortgage interest, better taxation rates for higher rate earners, paying into a tax efficient pension or building profit within the company for future investment.

Here's an example:

You’re a higher-rate taxpayer with a buy-to-let property that you’re currently letting out for £950 a month with a £600 per month interest-only mortgage. You receive £11,400 of rent each year and have profits of £4,200 after accounting for the cost of the mortgage. (For simplicity, we’ve not included additional expenses in this example.)

Personally owned

If you own the property in your personal name, you pay tax at 40% on the entire rental income received in the year, as mortgage interest is not considered to be an allowable deduction. This results in tax payable of £4,560.

However, you receive a tax credit on your mortgage interest costs calculated at 20% of their value, in this case £1,440. This credit is offset against the tax bill calculated above to produce an overall tax bill of £3,120 payable on your rental income for the year.

This reduces your overall profit from your rental property down to £1,080.

Limited company owned

Now let's consider owning property through a limited company. When you buy through a company you still pay tax on your profits, but this is at a lower rate than income tax, and you can deduct your mortgage interest costs as an allowable expense.

This creates a taxable profit of £4,200, and generally you will pay 19% corporation tax on this.

You're still making the same profit before tax, but this time you're paying just £798 of Corporation Tax, leaving you with £3,402 of remaining profit after tax.

Don’t forget if you don’t have any other dividend income in the year, you can withdraw up to £1,000 per tax year from the company as dividends without any personal tax being payable.

2. Section 24 does not apply to limited companies

When you buy a property through an investment company, your mortgage interest is fully allowable, reducing your tax bill further. Whereas for those who personally own property, only 20% of the mortgage interest is allowable through a tax credit. See our page on Section 24 for more information about mortgage interest relief.

3. Save quicker for your next investment by keeping profit in your company

Imagine you want to purchase another buy-to-let property and you need to save £15,000 to do so. If you bought your property personally, it would take you 14 years to get there based on saving the profit from the example above.

However, If you bought a property through a property investment company, it would take you just four and a half years. It's a staggering difference, and that comes down to the fact that it's really tax efficient to hold your profits inside a property investment company.

4. Tax savings on profits from dividends

What if you're not interested in buying your next buy-to-let property, and you just want to return a profit now?

With the personal property, the tax has already been accounted for. We know that you're making £1080 per year after tax, and that's yours to spend.

With a property investment company, the profit belongs to your company, and, if you'd like to draw down on it, you'll need to pay yourself a dividend.

The first £1000 of dividends per year are tax free, after which you'll pay tax of 32.5% on everything over £1000. Again, assuming you're a high rate taxpayer, this means for the same property purchased by the property investment company, you'll pay £483 of income tax, leaving you with a net profit after tax of £3003 compared to £1080 of profit when you own the property personally.

5. Mixing personally owned and company owned to save on your next investment

If you already personally own buy-to-let properties, you're probably wondering if you can transfer them into a property investment company. And the answer is technically yes but it' may not be worth it. And that's because you need to sell your property and buy it back through your limited company.

• When you sell the property personally, if the property has increased in value by more than £6000, you're going to have to consider capital gains tax - if you're a high-rate taxpayer that stands at 28%.

• When your property investment company buys the property, the company will need to pay stamp duty on the purchase. Stamp duty through a property investment company is the same as personal rates, plus an additional 3% surcharge. So you can see, it's an expensive process! There are exceptions, but they're very few and far between.

The good news is that you can own a mixture of personally owned properties and those owned through a property investment company. So you can keep your current portfolio, and then use a property investment company for your next purchase and enjoy all the tax benefits on the new property.