Property business to pay for your kids

Taking advantage of a property company

Investment property Companies can be highly tax efficient methods of building a property portfolio. We delve into some of the reasons why:

I recently wrote about why it is better to buy an investment property through a Company rather than as an individual or as individuals. The following article with develop additional benefits of having a property Company. This article is based on knowledge of the U.K. Tax system in 2016 but will be relevant to many western economies. The purpose of the article is illustrative and should encourage readers to go and seek specific, financial advice relevant to their situation.

Tax and reinvestment

Buying property using a Company will result in the net rental income (rental income after expenses such as fees, expenses and mortgage interest) being subject to corporation tax at 20%. Had the property been owned by a higher rate tax payer and outside of a Company the tax would have been at 40% the net rental income would have been higher. This is because mortgage interest expense is non-deductible from rental income if the property is held by an individual. Secondly, tax would be at 40% and not 20%.

If your intention is to use the first investment property to build up and to buy a second property as infinitum then these tax differences are important. If the property was owned directly by the individual then they would have paid 40% tax on the rental income leaving you with 60p in every £1 to reinvest in another Company. Whereas via a Company there would be 80p in every £1 earned to reinvest into the next property, not to mention that the £1 of earnings would have been higher in the second scenario due to the deductibility of interest payments.

This difference in tax will result in the Company scenario providing more than 33% increase in reinvestible returns meaning that you will build your property Company quicker. Cash can eventually be released from the Company in multiple ways: via Company dividends, via income, or via liquidation or selling of the Company. The downside of this is  that you will not be able to release your money invested in the Company without likely paying additional income and capital taxes. 

Maternity and pension income

On the other hand, having you capital tied up in the way provides you with the flexibility to determine when to take your cash. Had the money been invested in a property as an individual then you would have to take your income and pay the taxes as the rental income was paid. The Company option means that after corporation tax you are free to take out our money when the time is right for you.

Money can be taken out of the property Company at optimal times. For example, if you or your partner goes on paternity or maternity leave then you can release some of the profits of the Company to  pay an income or dividends when their income is lower paying less tax. Alternatively, you could wait until retirement and release the profits then.

Property and inheritance

Inheritance tax rules are different for a Company than for a property held by an individual. For an individual your children will likely pay inheritance tax at 40% (after the tax free threshold) on the investment properties. Whereas, a Company may be subject to various inheritance tax free deductions. Furthermore, you can give shares to your children in your property Company as they grow up (and hopefully long before you die) in which case their shares will be free from inheritance tax.

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