Should I Buy Property in my Own Name?

When I became a landlord back in 2003, it was accepted practice to buy property in your personal name, rather than a company. I am sure there were lenders that would give mortgages to a company, but it would have been very few and it simply wasn’t widely known.

This wasn’t a problem for many years, until the government introduced changes to the taxation of profits from letting residential property, which began to be phased in from the 2017-18 tax year onwards (known as the so-called Section 24 changes).

These changes may mean that investing within the wrapper of a limited company makes sense for you. I say may, as it depends on your current income and investment situation. This article will cover:

• Exactly what the Section 24 changes are and how they are implemented.
• Whether a Limited Company makes sense for you (there are disadvantages to this).
• What I am doing.

How does Section 24 Work?

Previously, the taxation of letting properties profits were treated as most small businesses are: From your gross rents received, you could deduct expenses such as management, maintenance and crucially, interest expenses from your mortgages. This left a net profit which was treated as extra income and taxed accordingly, at your marginal tax rate.

All well and good. However, the new taxation regime differs in two key respects:

1. You can no longer offset the full cost of your mortgage interest. From 2020, this will be limited to 20% of the mortgage interest amount.
2. They are changing how rental profits are calculated. As before, you can subtract management and maintenance from your gross rents, but not any mortgage interest. This total is then treated as additional income and taxed accordingly, after which a tax credit is applied (which by 2020, will be 20% of your mortgage interest costs).

Point 2 is subtle, but important:

• If, after including any rental income (minus expenses) on top of your day job, you still remain a basic rate taxpayer, then there is no change in the amount of tax you pay.
• If you are already a higher rate taxpayer because of your day job, then you will be taxed more heavily on your rental profits under the new regime.
• Point 2 also means that if you are currently a basic rate taxpayer in your day job, but your rental income (minus expenses) will push you into the higher rate tax bracket, then you will be paying more tax on your rental profits.

It also means it is perfectly possible to not make a profit in terms of net positive cash flow, but still have a tax bill which you will have to fund out of your own pocket!

Even my own accountant thinks this is bonkers.

But for now, it is here to stay and we don’t have much control over it, so we need to understand it, account for it and move on.

Should I Invest in a Limited Company?

What it does mean is that depending on your personal tax situation, it may make sense to invest in property through a limited company. This is because Section 24 does not (currently) apply to limited companies. A limited company pays corporation tax on its profits and interest expenses are fully allowable.

I say currently, because there is always the chance the government will tax residential lettings in limited companies in the same way. But we simply don’t know and have to act on the information we have right now.

There are some negatives to investing in a limited company:

• Administration costs: You have fiduciary duties as a Director of a limited company and there are more overheads to running one. Generally, accountants will charge more for compiling a company tax return compared with a self-assessment tax return.
• Interest Rates: This is a rapidly changing landscape as lenders adapt their products to reflect the new demand for investing through a limited company, but generally speaking interest rates are higher for limited companies than personal owners. There can also be complications where some lenders want to be the only lender to a company, which causes headaches if you want to expand.
• Extracting the Income: You as an individual and you as a company are different entities. To extract money from a limited company into your personal name, you declare dividend payments (assuming you are the shareholder as well as Director – they are different). If you wish to then take that money from the company, you will be subject to dividend taxation on withdrawal.

I cannot advise whether to go down the limited company route. Very generally speaking, if you are a higher rate taxpayer currently, or plan on doing any kind of Buy-to-Sell strategy, then a limited company is probably the way forward. But please speak to a qualified accountant to get a recommendation from someone who understands your personal tax situation and objectives with property.

Are there Alternatives?

For those of us with existing portfolio’s who will be impacted by the Section 24 changes, there are numerous schemes purporting to help alleviate your increased tax burdens. This is way out of my area of expertise. But be careful. Property investing is about playing the long game and doing anything rash in the short term could be detrimental to your long term wealth.

Ireland implemented similar changes to property income taxation back in 2009 and have now completely unwound it as they found it led to a shortage of rental properties as landlords withdrew from the market or stopped expanding. So there might be hope yet!

So personally, I am sitting tight and seeing what happens, but will make future purchases within a limited company entity and keep a foot in both camps, so to speak.

As ever, seek professional advice and make up your own mind depending on your personal circumstances.