Question on BTL mortgage relief

Pennywise wrote: »

But you can't get the same level of borrowings and will have higher interest costs as you'll need a commercial loan/mortgage rather than a far cheaper/easier BTL loan.

So, you'd have lower gearing by default, i.e. you'd never get anywhere near 90% LTV with a company loan - probably more like 60%/75% if you're lucky. You'd also have higher arrangement fees and higher interest rates. So, yes, you get better tax relief, but you also have higher costs!

I agree 75% is the upper end, and rates are not as good, but the number do add up if you have a large portfolio

lets assume you have a 10 property portfolio, at 75% LTV, £200k properties rented out for £1000 a month.

you can get a 3.19% 3 year LTD fix
you can get a 1.69% 3 year solo fix

total on mortgage = £1,500,000

LTD interest = £47,850
Solo interest = £25,350

total rental income £120k

solo tax
Tax due before mortgage rate relief = £40,696
Mortgage relief = £25350*20% = £5,070
tax due £35,626
cash in pocket = £59,024

company tax
Taxable profit £72,150 less £10k salary = £62,150
Corp tax at 19% = £11,808

Cash in company = £50,342

Dividend an additional £37,000

repay £13,342 of the capital you injected into the company (the 25% LTV you provided as a loan to the company, you could even charge some interest, tax free, and the director loan of £500k would support this withdrawal strategy for ~20 years.

Tax due
no income tax on the salary, and £32k of the dividend is taxed at 7.5% (£5k tax free) so £2400 income tax due

cash in pocket = £10,000+£13,342+£37000-£2400= £57,942

not a huge difference to the solo investor, and thats accounting for the mortgage interest rates.

Pennywise wrote: »

Not to mention higher "exit" taxes, i.e. full corporation tax on profit when you sell each property, no lower 10% CGT rate, no personal annual CGT exemption, no scope for main residence relief nor lettings relief if you live it in for part of your ownership period. Then you have double tax when you eventually close down the company and are taxed upon removing the funds from the company.

10% CGT rates do not apply to residential property transactions.

annual allowance is peanuts in the long term scheme of things.

you are also ignoring indexation allowance in a company.

as we are talking about serious BTL I do not consider letting relief or PPR as serious options, as a lot of the properties BTL owners own are not ones they would want to live in.

so in 20 years time property prices have quadrupled, RPI has increased by 250% (so real HPI of about 60%)

the above houses are now worth £800k each (£8m total), you sell one per year

personal tax due on the first sale
you are still a higher rate tax payer from the other 9 properties (assumed that everything has risen with RPI, rents, tax bands) so you pay CGT at 28%

CGT = (800-200)*28% = £168,000

cash in pocket = £632k - mortgage = £482k

Company tax due

Corp tax = (800-200*2.5)*19% = £57,000

Cash in Company = 800-57-150 = £593k

now the clever bit, if tax bands have kept up with RPI (250%) we have a tax free allowance of £28k, and a basic rate band of £80k and a tax free dividend allowance of £12.5k

In the company you can PLAN the tax exit strategy unlike with the owned house.

you give 1/2 of your shares to your wife, they can extract upto £130k per year for about £6k tax per year (given inflated tax bands), you can keep the cash in the company and extract it once the company has wound down (so no rental income), giving you a really tax efficient pension provision.

for instant access, owning outright might be better, but given the tax planning opportunities of a LTD you can REALLY cut your tax bill down.

Pennywise wrote: »

So, when you do the sums, it's not quite as simple and isn't really a valid comparison.

When you do all the sums, it really is a valid comparison, which is why a lot of the serious players are already LTD.