Buying Property: Company vs Personal Name

The Debate on Property Investment: Personal Name vs. Limited Company

Why is this even a question that comes up? Well, it all started a few years back and has really come to the forefront in 2021 when the tax allowances worsened significantly. Originally, everyone had property in their personal name. Then, due to legislative changes like Section 24, there was a shift towards purchasing properties through companies. Now, the prevailing advice suggests you must buy in a corporate entity, specifically a limited company. However, this isn't strictly true. The best approach really depends on your individual situation, which is what we will explore in this post.

The Impact of Tax Changes on Property Investment

Before the Tax Changes

Consider a property generating £1,000 in rent with a £700 mortgage payment, leaving a £300 profit margin (ignoring maintenance for simplicity). Assuming a higher tax rate of 40% in the UK, you would pay £1,440 in tax on an annual profit of £3,600, netting £2,160 after taxes.

After the Tax Changes in 2021

Now, with an annual income of £12,000 and mortgage interest of £8,400 (no longer considered a personal expense), you face a 40% tax on the total income (£4,800). However, a 20% tax relief on the interest payment (£1,680) adjusts the overall tax to £3,120. Consequently, the net income after £8,400 interest and £3,120 in tax is a mere £480.

This drastic change, introduced ironically by the conservative government, has significantly impacted the profitability of buy-to-let investments. But does this mean it's the end for buy-to-let landlords? Not necessarily.

Tax Implications for 20% Tax Payers

For individuals in the 20% tax bracket, the net income before and after the legislation remains £720, illustrating the variable impacts based on one's tax bracket.

Limited Company vs. Personal Name: An In-depth Look

Advantages of Investing through a Limited Company

• Limited Liability: Protects personal assets in case of bankruptcy or lawsuits.
• Tax Efficiency: Lower corporation tax rates compared to personal income and capital gains taxes.
• Mortgage Interest Deductions: Allows full deduction of mortgage interest, lowering taxable profits.
• Ownership Flexibility: Shares can be easily distributed or sold, aiding in estate planning and profit sharing.
• Suitability for Multiple Properties: Offers a structured approach for managing a significant portfolio.
• Reinvestment Opportunities: Profits can be reinvested without immediate additional taxation.

Disadvantages of a Limited Company Structure

• Higher Mortgage Rates and Fees: Companies may face higher rates and fewer mortgage options.
• Complex Administration: Involves filing annual accounts, tax returns, and possibly VAT returns.
• Operational Costs: Includes accountancy fees, registration fees, and other administrative expenses.
• Double Taxation on Withdrawals: Dividends are taxed at both the corporate and personal levels.
• No Personal Tax Allowance: Taxes apply from the first pound of profit.
• Costly Strategy Changes: Switching property ownership between personal and company names can incur taxes and fees.

JD Rockefeller famously said, "Own nothing, control everything." This principle can apply to property investment through a limited company, offering a way to minimize personal risk while maximizing control. However, it's crucial to understand the implications fully and seek professional advice before making a decision.

This is not financial advice. Please consult with a financial advisor.

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