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Hi,

I am not sure if this is the place for this, but i'll try anyway. :)
I am looking at making my first BTL investments and am trying to figure out the most tax efficient way of going about this from the get go. After some reading into the options of buying as an individual or as a Ltd Co I have come up this the following, would love it if someone could tell me if this is a sensible idea or if not suggest any alternatives:

2 people earning ~35k gross per year each (~15k below higher tax band)
We would split investment ownership and rental income 50/50

Would the best option be to:

  1. buy BTLs until the income generated (in addition to our main income) reaches just below the higher tax band, looking at things simply we could earn a total of just under 30k gross from property and remain basic rate tax payers @20%.
  2. Any subsequent investments should then be made through a Ltd Co in order to benefit from the Corporation Tax rate rather than paying the higher rate of tax band of 40%

I can see an issue with this if one or both of us were to get a pay rise which in addition to the property investments would then push us into the higher tax band, but at that point we could sell one or more of the properties to the Ltd Co - I suppose the argument there might be, why not just buy it through a Ltd Co in the first place and not have to pay the SDLT twice?

I hope that makes sense, thanks in advance

Cheers

Lewis

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I dont want to say whether it is a sensible idea, as I am not a tax expert and i dont think it is possible to conclude based on the information provided.  I think you have mentioned a couple of points that are commonly mentioned in such considerations, but there are (many) more.  I dont know whether you are thinking about getting / paying for some proper tax advice, but it may be beneficial / cost effective in the long run in this situation.

Just a couple of other points that sprang to mind whilst reading your post:

1 hour ago, lewiss said:

buy BTLs until the income generated (in addition to our main income) reaches just below the higher tax band, looking at things simply we could earn a total of just under 30k gross from property and remain basic rate tax payers @20%.

When you say "...30k gross..." I think it is net of allowable costs, but before financing cost.

Around the higher rate threshold, your effective tax rate may actually be significantly higher than 40%. This is because you lose some allowances / they reduce (e.g. savings allowance) as you become a higher rate tax payer.  Whether this is relevant depends on your other income.

I don't know whether you are going to be mortgaging your properties, but have you looked at the differential between individual and Ltd Co mortgage rates? E.g. using one of the online best buy tables, 5yr 75% LTV individual = 2.34% vs 5yr 75% LTV Ltd Co = 3.39%. This differential could nullify a large proportion of the benefits of incorporating.  You also have to factor in the additional admin costs of running the Ltd co.  

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Thanks for the reply! I certainly will look into getting some professional advice.

17 hours ago, farmer andrew said:

I think it is net of allowable costs, but before financing cost

Yes I believe that mortgage interest is not an allowable expense from April 2020. 

I would be looking at getting the investment properties mortgaged. I have seen that the rates are usually higher and there are more costs involved. 

I suppose I am trying to gauge whether it's worth spending a bit more now to be better set up for the longer term or whether it makes more sense to hold off until I'm closer to the high rate limit and then look into Ltd Co options given the higher costs. 

 I would want to use some of the income initially anyway it seems to me it would be better to stay as an individual investor and only be charged at basic rate rather than corporation tax + dividend tax.

Again all thoughts and comments welcome!

Cheers

Lewis

 

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15 hours ago, lewiss said:

Yes I believe that mortgage interest is not an allowable expense from April 2020. 

The mortgage interest part wasn't the point of my comment.

However, on the mortgage interest, this started back in 2017/2018 and is being phased in over 4 years: https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

But it only affects you overall if (over-simplifying) you are a higher rate tax payer.

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Hi Lewis

At Property Hub Tax we offer a Consultation Service that covers your queries.

We can discuss the options for investing personally or through a Limited Company in more detail. Please take a look at our website for more information, including an agenda of what is covered (see FAQs). https://propertyhub.net/service/tax/

We have slots left for May so if you are interested please drop me an email at tax@propertyhub.net

 

 

 

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