I fully understand the rationale for using limited companies, especially more recently for being able to claim financial costs fully. However, there is another aspect to consider and that is taking money out of the business. Everybody has different circumstances but you could potentially face a significant tax bill.
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Scenarios to consider
Full-time employment – If you are in full-time employment and your buy-to-let properties are there to become a pension for you in later years then incorporating certainly makes sense. Income can keep building up within the business and your tax exposure is lower.
Property business income – If you rely on the income from your property business then your position really needs to be considered. In the extreme scenario where you need all of the income generated and that income is significant, you will have to pay Corporation Tax of 20% (this will reduce over the next few years) on overall profit plus tax on any dividends you take out of the business. If you are a higher or additional rate tax payer, this would be 32.5% or 38.1% respectively for the 2016/2017 tax year.
According to Sunil Parekh, a partner at accountancy firm PJT and Co in London, says “where all the income needs to be drawn then both corporation tax and income tax become payable leading to an overall tax rate in excess of 50% for additional rate tax payers.”
Again please do talk to a specialist in this area before you make any decisions on how to structure your existing and future properties.
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