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  • Tax

    First buy to let - should I incorporate?

    Hi guys,

    Ive been lurking for a while and wanted to thank you all for the wealth of info you have provided. However, I am still not clear on whether or not to incorporate.

    I have an offer on a second property to my main residence that I intend to make a rental. I intend to leave this with an agent to manage long term, and I dont intend on taking out any profit, I will just let the rental pay off the repayment mortgage (75% LTV).

    The property is a £185000 2 bed flat with share of freehold.

    I work full time and earn £60k basic, no other sources of income.

    I am single with no dependents.

    I cant quite work out if it would be beneficial to incorporate. Most things I read say that its not worth it with only one rental property in your portfolio (I dont intend on buying any more), but these articles normally assume the property is already purchased.

    Any recommendations would be much appreciated, even if it is only a recommendation for broker/accountant to speak to.

    Thanks!

    G

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    Goatz,

    I am having to go through similar thinking, as I bought a second BTL in Manchester (first one in London) before Section 24 landed, though it is to be completed later this year.

    Knowing something of your circumstances from what you have mentioned in this post, I guess the crux comes down to that you are not a basic rate taxpayer.  Given that you already earn 60k, you are already a 40% taxpayer.  Previously the "profit" on the rental would have been taxed, but come 2020 Section 24 will be fully phased in, This means that you will pay 40% tax on the gross rental the property generates (est 9,250 @ 5% yield).  You would only be able to deduct 20% of the mortgage expense (4,850 @ 75% LTV @ 3.5% int rate). In this case then your annual "profit" would be 1,670 but of course this is before any agency costs (925 @ 8% + VAT). In short, the after-tax, after agency profit is only 745 a year.

    If you have this in a company, the key difference is that the rental would only be taxed at 19% now and 17% in a couple of years. Using the same numbers, "profit" would be 3,652 before agency commission or 2,725, nearly 4x the level if the property is in your personal name. You do get a personal dividend allowance of 2,000 so if you're stopping at just one property, in theory you could pay yourself nearly all of the profits without incurring taxes in your personal capacity.  Before you did that though, you would first pay yourself back the loan you made to the company to pay the deposit (46,000 @ 75% LTV), which would take a good while from these numbers. 

    Anyway, just some thoughts. Hope this helps to some extent.

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    thanks Roates, this is very helpful, and confirms that incorporation is the way to go.

    Im not too fussed about the extra paperwork or tax returns.

    Can anyone recommend a broker?

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    Hi Goatz,

    This thread may assist you:

    The BIG tax issue: Should I incorporate? 

    The truth is you should seek independent tax advice from a reputable source, as your situation is unique to you.

    RITA (Rental Income Tax Advisors) are the tax partner of Property Tribes. Click on the banner at the top of the thread to visit their website. Smile

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    the only part I dont understand is how to get the capital out if I choose to sell and roll up the business.

    I will lose the cgt allowance, and the cgt will be at 45% instead of 28%, is this correct.

    Also, are the risks of HRMC querying if the company is purely for tax purposes worth being concerned about? and would the accountancy fees per annum be ~£800 ?

    Based on the rates I have just received (fixed 5 year, ltd Paragon 3.65%, personal 2.79%) and a rental yield of 5%, there isnt much benefit in incorporating once the acountancy fees are factored in.

    Thanks

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