How do I find out whether to use a Property Company to Save Tax
With rental income insufficient to pay borrowing costs, using a company is one way of getting the taxman to completely fund your rental losses.
For example, let’s say James and Peter each borrow £1 million and pay £80,000 interest.
James invests personally and earns a rental profit of £70,000 before interest. After deducting interest costs he’s left with a rental loss of £10,000 which he can only carry forward.
Peter lends his borrowed funds to his property company and its properties also yield a rental profit of £70,000. Corporation tax at 22% comes to £15,400. Meanwhile, Peter personally claims interest relief for £80,000. As he has borrowed money to invest in his personal company, the interest payable on his borrowings is qualifying interest for which he can claim a tax deduction (up to the lower of his borrowing and his investment in the company) on his personal tax return. This will produce a tax repayment of £32,000 (£80,000 x 40%). Peter and his company receive an overall tax refund of £16,600 (£32,000 – £15,400). This is regardless of whether the company pays him interest on his investment in the company, but if it does, he must disclose the interest income on his tax return and a deduction on this company return – ideally there is no point of charging interest on the loan.
Remarkably, this net refund actually exceeds the overall deficit of £10,000 on the company’s property portfolio. In other words, Peter’s interest relief has turned an effective loss before tax of £10,000 into an effective profit after tax of £6,600 (£16,600 – £10,000).
The Government is therefore effectively funding Peter’s property portfolio and adding a little extra too!