Whether you are new to property investing or a veteran you will have noticed that conversation around whether to start buying a property in your own name or under a company structure has become more and more popular.
Since From April 2017, when section 24 was brought in, property investors have been hit by tax changes that could tremendously reduce their net returns. So firstly, what is section 24? Well, what it means is that investors can no longer claim the mortgage interest, or other property finance as an expense.
As a simplified example, let us say John has a buy to let property, which he rents out to a family for £700 a month. To purchase that property in his name, he most likely would have used a mortgage, more particularly an interest only mortgage that requires him to pay, let us say £200 of interest on a monthly basis. That leaves him with a £500 profit every month. Pre section 24, the £200 would be tax deductible meaning that only his £500 profit would be taxed BUT post section 24, the £200 is not tax deductible and thus john would need to pay tax on the whole £700. How much tax would really depend on John’s individual situation. It will depend on his other source as of income and ultimately category of taxpayer he is, whether he is a basic rate, higher rate or an additional rate taxpayer. It will mean higher-rate and additional-rate taxpayers will pay considerably more tax and in some cases even pay tax where they make no profit.
Well, whenever there is a problem, there is a solution right.The way to get around this is to invest in properties through company structure and thus pay corporation tax. Whether this is suitable for your individual case will be better advised by your accountant but in short if you are a higher rate or an additional rate tax payer in the UK then you probably want to do it this way. If you already have a ltd company then you may be considering buying properties through that company but is this the best way?
SPV vs Ltd Company
SPV stands for a Special Purpose Vehicle, it is a company structure that will be set up solely to buy & hold properties. The main benefit between this and buying in your ordinary business is that mortgage lenders find it easier to underwrite loans for SPVs because it is less complicated and in some ways less risky for them.
Getting started with setting up an SPV
You can, and maybe should get an accountant to do it for you, this is perhaps the best option as the accountant can advise you regarding your specific tax situation too. Or you can do this online yourself, it costs in and around £75. The important thing is that you choose the right Standard industry classification code (SIC) which makes it absolutely clear that the purpose of your business is to hold & let properties.
How to buy the properties:
The actual buying process is very similar to buying it in your own name. But if you already own properties in your own name and are thinking of transferring it into a SPV, then there are other things to consider such as capital gains and stamp duty tax. If you are struggling with this you can drop us an email contact@JAXFinancial.co.uk and we can guide you & connect you qualified and regulated tax accountants.
Just to add, that if you can prove that you run a proper property business rather than just being a property investor then it may be possible to be exempt from the the CG tax. Of course, that only depend if you sell at a profit, meaning selling at a higher price than what you bough it for.
Investing in property is a brilliant way to build wealth over time. In my humble opinion it is possibly quickest Investment class to achieve financial freedom because of the leverage. But for this same reason it has to be done properly, with due diligence and care. If you want to invest in multiple properties really think about opening an SPV but most importantly seek the advise of your accountant.
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