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Better to buy UK property via Ltd Company
Published on: Tuesday, September 19, 2023
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“We often get asked by clients whether or not they should buy their rental property via a limited company instead of in their own personal name," another property consultant said. - AFP pic for illustration only
Kota Kinabalu: At the recent Shareda’s PropEx 2023 property talk, the audience was told of the “Compelling Reasons for Investing in UK Property” presented by Chris Tan and Yudhi Mapara of SiiX Real Estate Pty Ltd of Melbourne, Australia.

According to them, to a question by Daily Express, it is better to buy UK property using a Limited Company than in the individual or personal names of purchasers.

“If the properties are owned via a Limited Company instead of in your personal name, the profits will be subject to Corporation Tax and not Income Tax.

“The current rate of Corporation Tax is 19 per cent. From April 2023, if the profits of the Limited Company exceed £250,000 the rate of Corporation Tax will increase to 25 per cent and if the amount of profits is between £50,000 and £250,000 the rate of tax will be between 19 per cent and 25 per cent and the exact rate will be calculated according to the profit made for that year. 

Chris Tan (left) and Yudhi Mapara of SiiX Real Estate Pty Ltd.

“Therefore, there can be significant tax savings for higher and additional rate taxpayers who would be paying 40 per cent and 45 per cent on these profits if the properties were owned personally in comparison to 19 per cent in the Limited Company.

“As a Director of a Limited Company, you can have trivial benefits of up to £300 per year tax-free from your Limited Company. This is not possible for landlords who own their rental property personally. 

“More importantly, if it is envisaged that the properties will be held for long-term investments it will be possible to structure the Limited Company to provide succession planning to ensure that the properties are passed to the children in the most tax-efficient manner by reducing, or in some cases eliminating the Inheritance Tax that would otherwise be applicable on the death of the landlord. 

Another property consultant said: “We often get asked by clients whether or not they should buy their rental property via a limited company instead of in their own personal name.

“The main driver for this conversation has been the introduction of the restriction for higher rate taxpayers when allowing mortgage interest as a deductible expense which is commonly known as Section 24. 

“It is important to realise that it was the intention of the government for higher rate taxpayers to contribute more in tax than their basic rate taxpayer counterparts when they brought in the Section 24 interest restrictions.

“One of the reasons for this is that the government wants private landlords who cannot afford to let out properties to sell these properties in order for more properties to be available to those looking to get on the property ladder.”

According to them, when landlords are looking at maximising their rental yield the number one item of expenditure that they will need to consider is the amount of tax that they will need to pay to His Majesty’s Revenue and Customs of UK on their profits. 

Since the introduction of the Section 24 rules in 2017, for higher rate and additional rate taxpayers it is now no longer possible to have mortgage interest allowable as a deduction in full against the rental profits if the property is owned personally.

Instead, you will receive a tax credit equivalent to 20 per cent of any interest paid.

However, there is no such restriction for Limited Company regardless of whether the Directors and Shareholders are themselves higher rate or additional rate taxpayers.

The mortgage interest expense is therefore allowed in full for Limited Companies when calculating the profits on which Corporation Tax will be payable on. 

This is a significant advantage for Limited Companies in comparison to owning the properties personally but only if you are a higher rate or additional rate taxpayer.

“If the properties are owned personally the rental profits will be taxed at your marginal rate of tax. The rate of Income Tax will therefore depend on what profits you earn from the property as well as all of your other income for that tax year. 

If not exempted by Malaysia-UK Double Taxation Agreement, emigrated Malaysian owners will need to add the profits from their rental property to all of their other rental income for the year including salary, dividends and other investment income including the rental profits from any other properties owned personally to arrive at your gross income for the year. 

The first £12,570 is covered by the owner’s tax-free personal allowance and the remainder of this gross income will be taxed at the rates based on the below table:

Tax Band                   Income                            Tax Rate

Basic Rate               £12,501 to £50,000             20%

Higher Rate             £50,001 to £150,000           40%

Additional Rate        over £150,000                     45%

For some landlords, one of the reasons they decide to purchase property via a Limited Company is due to the limited liability you have if something goes wrong. 

The financial liability cannot extend to you personally for any debts owed by the Limited Company other than in certain circumstances. 

If however, the lender obtains a personal guarantee when you purchase a property via a Limited Company it is important to note that if the mortgage is not paid they can come after your personal assets if after selling the property there are not enough funds to pay the remaining mortgage owed to the lender. 

However, as a rule of thumb, the mortgage rate you obtain in a Limited Company could be higher than the equivalent mortgage you would obtain on the same property in your personal name.

At a time of rising interest rates, buyers have to take this into consideration.

Even after paying this additional interest, it is still usually more tax efficient to purchase the property via a Limited Company for a higher rate and additional rate taxpayers although this will depend on the mortgage rates being offered. 

As a Director of the Limited Company, you may be asked by some lenders to provide a personal guarantee before they provide lending to the Limited Company.

If you need to withdraw money from the Limited Company for your own personal use this will need to be paid to you as dividends. 

The first £2,000 of dividends will be covered by your dividend allowance per shareholder and so can be withdrawn tax-free.  

Any amounts over and above the dividend allowance will be subject to tax at the marginal rate for you depending on your tax band.

Below is a summary of the applicable rates that will apply. 

Tax Band                The tax rate on dividends above the allowance

Basic Rate                8.755%

Higher Rate             33.75%

Additional Rate       39.35%

For those landlords who can afford to leave the rental profits in the limited company, they will not need to suffer this second layer of tax and so will achieve maximum tax efficiency.

The funds can be withdrawn in the future when the landlord had reduced income for example upon retirement and this can lead to further tax efficiencies. 

A spouse can be added as a shareholder to provide further tax efficiency depending on the income of the spouse.

Whether or not you should buy a rental property via a Limited Company will depend on your personal circumstances, they opined, whether this is the best solution for you in order to maximise your yield on your rental property and pay the least amount of tax possible.

While buying a property in a limited company is more tax efficient than buying personally, other costs determine how much profit you will make.

The mortgage will usually be your highest cost personally, so it makes sense to keep it as low as possible.

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