Sadly the answer to this question is “It Depends!!” However, there are some general principles that you can consider when deciding what is the best approach for you and your property business.
There are some questions which depend on your tax position, and a few that relate to your own preferences. These are some starting questions to ask yourself:
Are you a higher rate taxpayer, Additional rate taxpayer or neither?
Will any rental income take you into being a higher rate taxpayer?
With the changes in interest rate relief, the method of calculating the rental income has changed, as the interest paid on the mortgage is now restricted and not included in the calculation of your rental income. This has meant that anyone close to the higher rate tax threshold may now find themselves going over the limit, which is resulting in higher personal tax liabilities.
How are you buying the property? Will it be funded by debt or are you buying cash?
This will have an impact on how it is taxed with the changes to interest rate relief taking effect. For those buying a property outright, the changes will have no impact. However, those using debt funding to buy a property will be limited in the amount of interest that can be set off against the rent income, with the possible result that the tax liability may be higher.
What are your future plans? Are you looking at keeping the properties? Are you looking at expanding the portfolio? When are you looking at selling?
Your intention is one of the biggest factors in this decision. For short-term projects, keeping things in your own name may be tax efficient due to the capital gains tax allowances that individuals have compared to the company, which has none. However, if you are looking at a buy and hold strategy, it may be more beneficial to hold the portfolio in a company.
This is not a concise list of questions and the brief answers do not cover all eventualities, but this just provides you with an idea of the issues to start considering in respect of whether the company route may be the best direction for your property portfolio.
Obviously, this is the advice and considerations we are able to provide at this point in time. However, should there be any further changes made by the government, this may alter in the future, and you should ensure that you keep up to date with any changes in legislation that may affect the best option for you.
When you make your decision, you need to be able to stick with it. Many are finding that with properties owned in their own name, there can be significant costs associated with making changes at a later date.
June 27th, 2018