Owning buy to let properties through a limited company holds several advantages over owning the properties as an individual(s). This topic was discussed in a previous article.
In this article we look at particular circumstances under which the two options can be quite close, this is because of another factor that has a major impact on the financials – mortgage interest.
Mortgage interest rates can vary materially between personal and company ownership. For a mortgage of 75% loan to value ratio (25% deposit), the interest rate can be as low as 1.9% for individuals, while the interest rate for companies could be as high as 3.6%. With a variance this great, it is necessary to assess whether the tax benefit of a limited company structure really outweighs the extra cost of higher interest payments.
As is often the case, this decision depends on the individual’s income level and structure. In an ideal world, where mortgage interest rates are similar for individual and company ownership, total income of £50,000 is a dividing line below which owning properties as an individual makes more sense. And above which, owning properties via limited companies saves more tax. However, because of the substantial difference in mortgage interest between the two structures, this line can shift to be much higher than £50,000.
Total income up to £100,000
The table below shows a comparison between individual and company ownership.
|
Individual |
Company |
|
| Outstanding mortgage |
500,000 |
500,000 |
| Mortgage interest rate |
1.90% |
3.60% |
| Mortgage interest payment |
9,500 |
18,000 |
| Salary |
75,000 |
75,000 |
| Rental income |
25,000 |
25,000 |
| Total income |
100,000 |
100,000 |
| Tax |
25,600 |
18,830 |
| Outlay-Mortgage interest |
9,500 |
18,000 |
| Total Tax and Mortgage interest |
35,100 |
36,830 |
The total outlay is tax and mortgage interest payment. Even with a total income of £100,000, the outlay is lower for individual ownership, suggesting that up to a total income of £100,000, it is better to own properties under individual names.
The main assumptions are:
- Interest rates of 1.9% and 3.6% respectively for individual and company ownership
- Rental income represents the net of rental revenue minus all other costs except mortgage interest
- Profit after corporation tax remains in the company, and no dividend is withdrawn
- No Capital Gains Tax (CGT) is included in the calculation
After a few years, when the property price has appreciated, the two types of ownership entail different exit strategies. For individual ownership, the journey is complete when the owner sells the property and pays CGT; for companies, owners will pay corporation tax on the price gain, and take all the capital out of the company via entrepreneurs’ relief. Individuals paying CGT will pay less tax than company directors, particularly if the latter did not take much dividend throughout the period of ownership.
Total income above £100,000
|
Individual |
Company |
|
| Outstanding mortgage |
500,000 |
500,000 |
| Mortgage interest rate | 1.90% |
3.60% |
| Mortgage interest payment |
9,500 |
18,000 |
| Salary |
80,000 |
80,000 |
| Rental income |
25,000 |
25,000 |
| Total income |
105,000 |
105,000 |
| Tax |
30,100 |
20,830 |
| Outlay-Mortgage interest |
9,500 |
18,000 |
| Total Tax and Mortgage interest |
39,600 |
38,830 |
In this scenario, rental income is the same as the first scenario, but the salary is £80,000, taking the total income above £100,000. This is when an individual starts to lose personal allowance, and it is better to own properties via a company, even with the much higher mortgage interest rates.
There is a note on salary: additional pension contribution will help reduce taxable salary. For example, if gross salary is £100,000, and payroll pension contribution is £10,000 including both employer and employee contribution, and an extra £30,000 contribution is made by the individual, it will reduce the taxable salary to £70,000. However, contributions of more than £30,000 will not help further, as the annual tax-exempt pension limit is £40,000.
Couples at different tax rates
It is not uncommon for couples to be at different tax rates. One can be a basic rate tax-payer and the other a higher or additional rate payer. In this case, the couple can own the properties under individual names, but the partners will have to agree that the person with lower income owns a majority percentage to pay lower tax overall.
Summary
When choosing individual or company ownership, key questions to ask are: what is the difference between the available mortgage interest rates for individuals and companies? What is the combined total income? Can you afford to put more money away into pension?