Investing in property through a limited company, often referred to as a Special Purpose Vehicle (SPV), can offer significant tax advantages compared to personal ownership. This approach has become increasingly popular among property investors seeking to optimize their tax liabilities and enhance their investment returns. Below, we explore five key ways an SPV can help you save on taxes, along with considerations to keep in mind.
Lower Corporation Tax Rates
Individuals pay Income Tax on rental income at rates up to 45% for additional-rate taxpayers. In contrast, limited companies are subject to Corporation Tax on profits, which is currently 19% for profits up to £50,000 and 25% for profits over £250,000. This difference can result in substantial tax savings, especially for higher-rate taxpayers.
Example:
Consider a property generating an annual rental income of £20,000, with allowable expenses of £5,000, resulting in a net profit of £15,000.
• Personal Ownership: As a higher-rate taxpayer (40%), you would pay £6,000 in Income Tax, leaving you with £9,000 after tax.
• Company Ownership: The company pays 19% Corporation Tax on £15,000, amounting to £2,850, leaving £12,150 in the company.
In this scenario, owning the property through a company results in £3,150 more retained profit compared to personal ownership.
Full Deduction of Mortgage Interest
Limited companies can fully deduct mortgage interest from rental income before calculating taxable profits. Individuals, however, are restricted by Section 24 regulations, which allow only a 20% tax credit on mortgage interest. This full deduction can significantly reduce the taxable profit for companies, leading to lower tax liabilities.
Example:
Assume a property with an annual rental income of £20,000 and mortgage interest payments of £8,000.
• Personal Ownership: Only a 20% tax credit on the £8,000 interest (£1,600) is available, reducing the tax liability slightly.
• Company Ownership: The full £8,000 interest is deductible, reducing taxable profit to £12,000, leading to a lower Corporation Tax bill.
This ability to fully deduct mortgage interest can make a significant difference in the overall profitability of your investment.
Retaining Profits for Reinvestment
Retaining profits within a company allows for reinvestment into additional properties without immediate personal tax liabilities. This approach enables faster growth of your property portfolio, as profits are taxed at the lower Corporation Tax rate and can be reinvested without further tax implications until dividends are paid out.
Example:
If your company retains £12,150 after tax annually, over five years, you would accumulate £60,750. This amount could be used as a deposit for purchasing additional properties, thereby expanding your portfolio more rapidly than if profits were withdrawn and subjected to higher personal tax rates.
Tax-Efficient Dividend Payments
When extracting profits from a company, dividends are taxed at rates lower than Income Tax. For the 2024/25 tax year, the dividend tax rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. Additionally, there’s a £1,000 dividend allowance, meaning the first £1,000 of dividend income is tax-free. This structure can be more tax-efficient than receiving rental income personally.
Example:
If you decide to withdraw £10,000 as a dividend:
• Personal Ownership: Rental income is taxed at your marginal rate (e.g., 40% for higher-rate taxpayers).
• Company Ownership: The first £1,000 is tax-free; the remaining £9,000 is taxed at 33.75%, resulting in a tax liability of £3,037.50, leaving you with £6,962.50.
This method allows for more efficient extraction of profits, especially when combined with other allowances and reliefs.
Potential Inheritance Tax Benefits
Properties held within a limited company may qualify for Business Property Relief (BPR), potentially reducing the value of the business for Inheritance Tax purposes. To qualify, the company must be a trading business, and at least 50% of its activities should involve more than just holding property for investment. This relief can make it more tax-efficient to pass on property assets to heirs.
Considerations:
• Administrative Costs: Running a company involves additional administrative responsibilities and costs, including annual accounts and corporation tax returns.
• Mortgage Availability: Mortgage options for companies can be more limited and may come with higher interest rates compared to personal mortgages.
• Capital Gains Tax on Transfer: Transferring personally owned properties into a company can trigger Capital Gains Tax and Stamp Duty Land Tax liabilities.
It’s advisable to consult with a tax professional to assess whether using a limited company aligns with your investment goals and personal circumstances.
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