Increase your property investment profits as a limited company

Posted by Mark Lloyd, Property Mastery Academy on 18 June 2018 | Comments

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The main reason many property investors decide to set up limited companies to invest in property is tax.

In 2016, the government set in motion changes to the mortgage interest property investors pay. Previously, you could deduct your mortgage interest when calculating profit.

property investment as limited company

However, this is being phased out and by 2020, you won’t be able to offset any of your interest payments against your rental income. Instead, you can only claim tax relief against your mortgage interest payments and only at the basic rate of income tax, which means higher rate taxpayers will be hit hardest.

Why invest as a limited company?

One reason to invest as a limited company is because your rental income profits after costs are treated as corporate profits rather than treated as personal earnings. Therefore, they’ll be taxed at the corporation tax rate, which is presently 19% and due to decrease to 17% in 2020.

For higher rate and additional rate taxpayers, this can significantly reduce your tax liability and marginally lessen it for basic rate taxpayers.

By investing as a limited company, you can also change the way your mortgage interest payments are treated. As a limited company, mortgage interest payments are measured as a cost of running your business. This means you’re allowed to deduct them from your gross rental profits.

You could also choose to set up a limited company to mitigate inheritance tax by employing different trust structures or types of shares. This is tempting if you intend to leave a sizeable property portfolio to a relative.

Is a limited company for me?

To decide if setting up a limited company will be of benefit to you, bear in mind that it could make mortgages trickier to secure, however, a decent mortgage broker should be able to help.

You also need to take into consideration the time and financial costs of setting up and running your own limited company. You’ll need to keep company accounts, and there’s a whole heap of other paperwork and admin that will come your way.

Next, you could end up being taxed on the dividends you take. The first £2,000 per person is tax-free, but after that dividend income is taxed with your other income, which could result in you paying more tax than you would have as an individual investor.

Different property investment strategies

As a property investor, there are many different strategies you can adopt and setting up a limited company is just one of them.

If you’re a higher rate taxpayer now or will be in future and you have, or plan to have, a portfolio of properties, setting up a limited company could well be a viable option. This approach can offer flexibility and help you to reduce your tax liability – saving you a considerable amount of money and allowing you to grow your business.

If setting up a company is not for you, there are plenty of other property investment strategies out there. Take the time to review your options and seek out expert advice.

At PMA we run a Mentoring Programme to show you how to invest in property as well as a range of courses aimed at beginners and seasoned property investors.

Would you like to learn more about property investment strategies?

Then register for our Introductory Property Foundations Course

3 Days and 12 Strategies

The Property Foundations course will help you understand the different property investment strategies you can use in today’s property market.

Dates: 20, 21 & 22 July 2018

Venue: Park Inn Hotel, Heathrow

Pre-register for your early-bird ticket here and receive up to 30% off