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Property tax
Published
27/07/2021
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Property tax

5 ways to save tax with a property investment company

James Poyser
CEO

When you purchasing a buy-to-let, there are two main ways of buying the property: you can either buy it personally or buy it through a property investment company (also known as an SPV). This article looks at 5 ways you can save tax by purchasing property through a limited company.

What is a property investment company?

Personally owned

When you buy a property personally, the deeds are in your name, the mortgage is in your name and you personally pay income tax on any profits from your buy-to-let property.

Company/SPV owned

If you buy the property through a property investment company you own the company, the company buys the properties, any mortgages are in the company's name, and the company pays corporation tax on any profit from the buy-to-let properties.

SPVs

Property investment companies are also known as SPVs or special purpose vehicles, and they're surprisingly common. In the first quarter of 2019, 49% of all buy-to-let mortgages were issued to property investment companies.

Mortgage rates are at an all-time low and rents remain strong, yet investing in property is much tougher than it used to be. Increased regulation, stamp duty changes and decreasing tax relief means many property investors have seen a reduction in their rental revenue. However, for many Britons living in a world of low savings interest rates, volatility in the stock market and economic uncertainty, 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.

Here are 5 examples of how a property investment company can help to save tax

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

Well, it comes down to the flexibility and the opportunity to save tax. First, let's consider personally owned buy-to-let property. With a personally owned property you pay income tax on your rental income.

So here's an example. If you've got a buy-to-let that you're currently letting out for £950 a month with a £600 per month mortgage, you'll make £4200 of profits per year, before tax. You'll then have to pay £3120 a year in income tax, leaving you with £1080 of income after tax.

Buy-to-let example property
Rent income per month£950
Mortgage costs per month£600
Annual profit (before tax)£4200

Now let's consider buying a property through a property investment company. When you buy through a company, you still pay tax on your profits, but you pay corporation tax, not income tax.

You're still making the same amount of gross profits, but this time you're paying just £798 of corporation tax, leaving you with £3402 of profit after tax.

Buy-to-let example propertyPersonally ownedLimited company owned
Annual profit (before tax)£4200£4200
Income Tax (40%) £3120
Corporation Tax (19%)£798
Annual profit (after tax)£1080£3402

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 £2000 of dividends per year are tax free, after which you'll pay tax of 32.5% on everything over £2000. 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's unlikely to 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 £12,000, 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.

Looking to learn more about buying properties via a limited company?

Check out our expert guide on Setting up a Limited Company for Property Investment.

Read the guide
James Poyser
CEO

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