When considering the ownership of a second property in the UK, there are two main options to choose from:
1 – owning the property personally or
2 – owning through a limited company
(other options are available but we won’t go into those here).
Here are some key considerations for each option:
Personal Ownership
- Tax Implications: If you own the second property personally, the rental income generated will be subject to income tax at your applicable tax rate. You can deduct certain allowable expenses, as mentioned in the previous blog post, to reduce your tax liability. Additionally, if you decide to sell the property in the future, you may be liable for Capital Gains Tax (CGT) on any profit made from the sale.
- Mortgage Availability: Obtaining a mortgage for a second property can be easier when owning it personally, as lenders typically have more stringent criteria for lending to limited companies.
- Flexibility: Personal ownership offers more flexibility in terms of managing and making decisions regarding the property. You have direct control over property-related matters, such as repairs, renovations, and tenant selection.
Limited Company Ownership
- Tax Implications: Owning the second property through a limited company can have different tax implications. Instead of paying income tax on rental income, the company will be subject to Corporation Tax on its profits. The current Corporation Tax rate in the UK is 19% for profits less than £50,000. However, it’s important to note that the rules and tax rates change, so it’s essential to stay updated with the latest regulations.
- Mortgage Availability: Limited company ownership may have more limited options for obtaining a mortgage compared to personal ownership. Lenders often require higher deposits and charge higher interest rates for limited companies.
- Limited Liability: An advantage of owning the property through a limited company is the limited liability protection it provides. In case of any legal issues or financial liabilities related to the property, your personal assets may be protected to some extent.
- Interest Relief: One of the more critical aspects to consider due to changes to the rules in recent years (and particularly in relation to recent higher mortgage rates) is the availability of tax relief on interest paid which is available in full for companies but is limited to basic rate relief for individuals.
- Sheltered Profits: If the income you receive in rent is not required to be drawn out of the company then any profit can be sheltered at a lower tax.
It’s crucial to carefully consider your specific circumstances and consult with a tax professional or financial advisor before making a decision.
They can provide personalised advice based on your financial goals, tax situation, and long-term plans.
This article was provided by our accounting partners at Shapes.
If you would like to discuss how Shapes could help you with your tax obligations please reach out to Jim from Shapes, a chartered accountant with years of experience.
