Using a Company to Grow Your Property Portfolio A company comes into its own when the plan is to reinvest the rental profits in more property, rather than to draw them out for living expenses. Jane has a well-paid job, and pays Income Tax at 40%. She wants to buildup a portfolio of rented properties, using the profits from the rentals to fund the acquisition of other properties. She begins with a portfolio of 10 buy to let properties in 2018, and leaves profits there to fund the deposits on new properties.
Company Direct
ownership
Profits 20,000 20,000
Costs specific to company (1,000) NIL
Profit after costs 19,000 20,000
Tax payable (3,610) (8,000)
Cash for reinvestment 15 390 12,000
If the pattern is repeated in the following years, it is clear that she will be able to spend more money (within the company) on investing in new properties than she would if she were paying Income Tax on the rents. This relative saving will result in a “virtuous cycle”, whereby each year can result in better and better results, thanks to the lower Corporate Tax rate. In (say) 2030, Jane’s company sells some of its properties. The disposals are subject to Corporation Tax on capital gains: Company Direct
ownership
Proceeds 500,000 500,000
Cost of properties (200,000) (200,000)
Capital Gain 300,000 300,000
Tax payable (19% / 28%) (57,000) (84,000)
Cash for reinvestment 443,000 416,000 The company benefits from a significantly lower tax rate than Jane would pay on residential property that she owned personally. The net resultis that the company pays a lot less tax than Jane would, if she owned the properties personally. Note: Jane would normally have to pay more tax to access those funds in the company – the so-called “double tax charge” – where the company pays tax on profits or gains, and then the shareholder/director pays tax to get the funds out of the company for personal use.
These examples serve to illustrate how companies have the advantage if they are able to retain their profits, year on year, to boost growth.
However, there is a new development that will, for many residential landlords, tip the balance strongly in favour of incorporation, whether they keep the profits in the company or not. That is the disallowance of finance costs in relation to the letting of residential property.
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