Tax Efficiency in Property Investment: Strategies for Investors

When it comes to investing in property, this can be a great way to save tax if you have a limited company. Tax efficiency in property investment can be quite complex as there are lots of tax laws you need to follow in order to minimise your tax liability and enhance your investment returns. In this guide, we are going to cover everything you need to know.

Understanding Tax Deductions

One of the best ways to achieve tax efficiency in property investment is through tax deductions. There are various expenses that can be deducted from your taxable income, including:

1. Mortgage interest – interest paid on loans for investment properties can be deducted, helping to reduce your overall taxable income.
2. Property management fees – costs associated with hiring property managers can be deducted.
3. Repairs and maintenance – routine repairs and maintenance can be deducted in the year that they were incurred.
4. Depreciation – whether a property decreases or increases in value over time, investors are able to deduct the cost of the property over its lifespan.

Tax Implications of Property Investment

If you are looking to purchase a property through a limited company structure, there are several factors you need to consider in detail:

1. Corporation Tax vs Income Tax

Profits made through limited companies are subject to Corporation Tax, which is currently 25% for profits above £250,000 and 19% for profits below £50,000. Individuals are charged Income Tax at 40% for earnings between £50,271 and £125,140, and 45% for any amount above that. When comparing those figures, you can see that Corporation Tax is generally lower than Income Tax which is why purchasing property through a business is more tax-efficient.

2. Capital Gains Tax

Any gain is subject to a Capital Gains Tax of 20% when a limited company sells a property, which is lower than the 28% rate for individuals who sell a residential property. However, it is worth noting that the annual tax-free allowance for individuals is higher.

3. Stamp Duty Land Tax

When purchasing a property that is worth more than £40,000 through a limited company, you will pay the higher Stamp Duty Land Tax of between 3-15%.

4. Restrictions on Interest Relief

Mortgage interest costs taken out by limited companies are subject to restrictions on interest relief, but this restriction is only applicable if you have financing costs and net interest over £2 million in 12 months. For individuals purchasing property, all mortgage interest costs are fully deductible.

5. Additional Accounting Requirements

When weighing up the pros and cons of investing in property, remember that limited companies have a much more complex accounting system to ensure tax efficiency. This means accounting fees will be higher than average, so factor this into your calculations.

The Advantages and Disadvantages

There are lots of pros and cons when it comes to purchasing a property through a limited company, so let’s have a look at these in further detail.

The Advantages:

• If you are a higher-rate taxpayer, you may save on your tax bill
• Mortgage interest is treated as a business expense for limited companies, so can be deducted against corporation tax
• You may be able to mitigate inheritance tax

The Disadvantages:

• Increased administrative burden and associated costs
• Reduced access to buy-to-let mortgage deals
• Higher buy to let mortgage interest rates

Overall, there are definitely ways to achieve tax efficiency in property investment through a strategic approach. It is really important to have a thorough understanding of the tax laws, so consulting with an accountant is key to help. If this is something you are interested in finding out more about, get in touch with the experts at Wright Vigar who are more than happy to help.