The best way to buy to let

In the current climate of economic uncertainty, building a buy-to-let portfolio is a popular choice for those seeking financial security.

Save yourself a lot of tax

Practice principals who are weighing up the benefits of a buy-to-let should consider making their purchase through a company, because they could save themselves a lot of tax.

If the rental portfolio in question is likely to reap yearly profit of around £50,000, it is a good opportunity for a company-owned buy-to-let business.

Most tax experts would give this figure as a guideline, although naturally the amount will fluctuate depending on if and by how much the Chancellor changes the tax rates.

Through my company or as an individual?

As things currently stand, an individual can end up paying more tax on rental income than a company.

It depends entirely on the individual’s personal rate of tax.

For example, if you pay the basic rate, which is 20%, the company would pay the same amount of tax so there would be no benefit.

The savings come into play for individuals who are higher rate taxpayers, such as 40% or 50%, enabling them to significantly reduce their tax bill.

The down side is that the income is subject to personal tax the moment the individual retrieves it from the company, negating any savings made.

In fact, principals would end up paying a larger amount of tax than if they’d purchased the buy-to-let as an individual.

How does it work?

For those that can play the long game, the arrangement makes a lot more sense. For example, a married couple acquires a buy-to-let for £200,000 through a company in order to boost their retirement plans.

Each year, the property generates an average rental profit of £8,000 and the company pays £1,600 in tax (20%).

Assuming that each spouse is a higher rate taxpayer, if they had owned the property personally, their annual tax bill would have been £3,200.

By the time they retire 15 years down the line, they will have made an extra saving of £24,000.

Also, the couple may be able to avoid paying higher rate taxes when they retire. Individuals don’t have to take all of their income from the property company immediately.

They can arrange for a fixed or variable amount, or dividend, to be withdrawn and if it is below the basic rate (currently about £40,000 per person, per annum, depending on their other income and tax circumstances), they may be able to avoid triggering any personal tax liability whatsoever!

Even better, principals who sell a buy-to-let through a company would only have to pay 20% Capital Gains Tax, as opposed to 28% if held personally, and would also be cushioned from the effects of inflation with an indexation allowance not available to individuals.

All in all, a company-owned buy-to-let portfolio is a viable and lucrative option for those who are making long-term financial plans, but not for principals with more immediate need of the income.

First published in in August 2012.

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