As a property investor in the UK, one of the key decisions you’ll face is which is better for investment: personal or corporate property purchasing? Both options have their pros and cons, so it’s important to understand the differences and weigh up the factors that matter most to you.
Purchasing property in your own name, also known as buying in a personal capacity, means that you’ll be the sole owner of the property and will receive all the income generated from rent. In this scenario, you’ll also be personally responsible for paying tax on the rental income, which can be higher than the rate paid by companies.
On the other hand, purchasing property through a business, such as a limited company, can offer a number of tax benefits. For example, companies generally pay corporation tax at a lower rate than individuals, which can help reduce the overall tax bill.
A Word About Personal And Corporate Tax
The first thing to say is that we are not accountants. The rules are complicated and there are a number of conditions. You are advised to take expert advise from an accountant before making this decision. However, here is a brief summary.
Property purchased in a personal name is taxed at the band at which the taxpayer currently earns. If you are a higher rate tax payer, the property profits are taxed at the higher rate tax band.
In April 2021, Section 24 fully came into force. It is also known as the ‘tenant tax.’ Which means there are circumstances where, if you are a basic rate tax payer, your property, purchased in your personal name, will push you into a higher tax bracket. Under the new rules, mortgage interest charges cannot be taken off before tax. Instead, individuals receive mortgage credit of up to 20%. That is, 20% of your mortgage interest charges are given back as a credit.
The formula you will use to see an indication of how much tax you could pay on your rental property profits is:
Employment income + Rental profits (Rental income – Property expenses) = Total income. From this you can work out your Tax Band.
Rental profits x Tax at basic, higher or additional rate percentage – Mortgage credit = Tax on rental profits
For example:
£30,000 employment income + (£25,000 rental income – £2,000 expenses = £23,000 rental profits) = £53,000 taxable income. Therefore this example fits into the higher rate tax band.*
£23,000 rental profits x tax rate (**in this case, £20,27o taxed at the basic rate of 20% and £2,730 taxed at the higher rate of 40% = £5,146) – £1,200 mortgage credit (£6,000 mortgage interest charge x 20%) = £3,946 tax on rental profits.
Companies are currently taxed at 20% corporation tax (although the current Prime Minister, Rishi Sunak wants to increase this to 21%). Companies also do not pay the Section 24 ‘tenant tax’.
