jsm tax

Incorporating Your Property Portfolio

"The power of the section 24 punch is felt more amid rising interest rates"

It’s been a popular topic for the past 5 or so years since the inception of the section 24 tax changes which led to the unincorporated landlord being unable to deduct mortgage and finance expenses against profits from a property business. 

Fortunately for many, the changes were introduced at a time where interest rates were at record lows meaning the mortgage interest payments were also low. However, mortgages interest rates are now creeping up and expected to go as high as 5% next year.

As a landlord with other income of £50,000, property profits excluding mortgage interest of £50,000, and mortgage interest of £20,000. Currently the total tax would be:

  • £50,000 taxed at 40%, £20,000
  • £20,000 of finance costs with a 20% tax credit, £4,000
  • Net amount of tax payable £16,000
Looking at the actual cash here, the cash profit is only £30,000 and with this there is an approximate £16,000 tax bill, a 53% tax rate!

However fast forward 12 months, rents have increased slightly bringing the same profits excluding mortgage interest up to £55,000, but with the rate rises the finance costs are now £35,000.

  • £55,000 taxed at 40%, £22,000
  • £35,000 of finance costs with a 20% tax credit, £7,000
  •  Net amount of tax payable £15,000
The amount of tax due has gone down with the mortgage interest credit going up, as before it’s important to look at the cash profits. There would be cash profits of £55,000 less the £35,000 (£20,000). 

Out of this £20,000 there is £15,000 of tax due, meaning that the landlord is left with a mere £5,000… an eye watering 75% tax rate. 

To keep the calculations simple we’ve not even factored in the loss of the personal allowance where the adjusted income exceeds £100,000, once this is factored in the tax rate increases even further.

If this property portfolio was incorporated into a limited company the whole profit would be taxed at just 19%, giving a tax cost of around £4,000 a year, over £10,000 a year in tax saved. It would also present additional tax planning opportunities such as the ability to pass the property portfolio to the next generation in an IHT efficient manner.

If you’re a landlord with property in your own name, we can help review your structure and incorporate if that’s the most beneficial solution for you.