Understanding the Impact of Section 24: Personal vs. Ltd Company for Landlords
If you’re a landlord, you’ve likely felt the impact of Section 24 on your bottom line. This legislation, which phased out the ability for landlords to deduct most of their finance costs (such as mortgage interest) from their rental income before calculating their tax liability, has had significant repercussions. Essentially, it means you might be paying income tax on your gross rental income—whether or not you actually make a profit. This shift can be the difference between a profitable venture and one that operates at a loss.
On the other hand, finance costs remain wholly tax-deductible for properties held in a Limited Company (Ltd). This distinction has driven many landlords to reconsider how they hold their property investments.
The Numbers: A Comparative Example
To illustrate the financial implications, let’s consider a practical example. Imagine a higher-rate taxpayer who would typically pay 40% income tax on their rental income.
Scenario 1: Property Held Personally
- Gross Rent: £10,000
- Income Tax @ 40%: -£4,000
- Finance Costs: -£6,500
- Net Profit: -£500
- Tax Credit @ 20% of Finance Costs: £1,300
- Profit After Tax Credit: £800
In this scenario, even though the property generates £10,000 in rent, the combination of income tax and finance costs leaves the landlord with only £800 after claiming the tax credit. The landlord might even face a loss before applying the tax credit, which is a less than ideal situation.
Scenario 2: Property Held in a Ltd Company
- Gross Rent: £10,000
- Finance Costs: -£6,500
- Net Profit: £3,500
- Corporation Tax @ 19%: -£665
- Profit After Tax: £2,835
For the same property held within a Limited Company, the outcome is markedly different. After deducting finance costs, the company’s net profit is £3,500. After paying 19% corporation tax, the remaining profit is £2,835—significantly more than the £800 profit when held personally.
What Does This Mean for You?
The financial advantage of holding property within a Ltd Company is clear, particularly for higher-rate taxpayers. Not only does it offer more favorable tax treatment of finance costs, but the profit can be reinvested within the company or withdrawn at dividend tax rates, which are generally lower than income tax rates.
If you’re a landlord struggling with the effects of Section 24 or simply exploring more tax-efficient ways to manage your property portfolio, setting up a property holding company could be a smart move.
Feel free to reach out if you want to discuss your options further. Now might be the perfect time to restructure your property investments to maximize your returns. 📲
