Transcription
Back in the day when I started property investing, hardly anybody bought a limited company. He spent all the money on it; he thinks he owns it, but actually, it's owned by the government. The interest rates you pay in a limited company are the same as in a personal rate. So this whole narrative of always buy through a company is wrong.
What you really should be thinking is, what am I going to buy? Wow, that's a tax-free income, big time! Another advantage to earning in your personal name is it's completely anonymous. Technically, it should be done this way, but don't cry about it.
Why would somebody set up a company and invest in property through a company? What are the advantages? A lot of YouTubers, influencers, and people that talk about property have this narrative: never ever buy a house in your personal name; only buy it in a company.
Now, there are, of course, advantages to buying in a company. I own, as you know, a lot of properties in my personal name, and I wanted to really dive into the pros and cons of buying in your personal name versus a company because there are actually a lot of tax benefits to buying in your personal name, even today, isn't there? Correct.
So that's what I wanted to thrash out. Let's start by talking about the benefits of buying through a company because that's what everybody bangs on about. Why would somebody set up a company and invest in property through a company? What are the advantages?
Well, back in the day, they introduced Section 24, which meant that mortgage interest was not allowable in a personal name. So people then bought in a limited company where the mortgage interest is totally allowable, right? And that's why people buy a limited company. It's just a good vehicle; I don't disagree with it.
The advantages for inheritance tax purposes are that you can set your company up in such a way that you can pass properties down inheritance tax-free. So a company is a good vehicle, but it's not the only vehicle.
What are the other vehicles? Back in the day when I started property investing, hardly anybody bought in a limited company; you bought in a personal name. For inheritance tax purposes, you might take out life insurance cover to cover you, and that gets paid into your trust fund. That's what I have.
So you can cover it that way. But I've had to sit down and think, I've got properties in my personal name. Yes, I'm paying Section 24, but there's this assumption made by so many people that the interest rates you pay in a limited company are the same as in your personal name.
I found this a few years ago. I was buying property in a limited company, and a mortgage broker said to me, "Tim, I suggest you buy in your personal name." It was a holiday let, no Section 24. He said interest rates are much cheaper. So I said, fine, I'll buy in my personal name.
It's this difference that in a limited company, the interest rates are higher than in your personal name. On average, there's about a percent difference. They have changed that; the holiday lets, I think they have changed it.
So yes, now Section 24 hits holiday lets. But the point is, you pay higher interest in a limited company than you do in your personal name. I've sat down and done the calculations, and depending on where interest rates are, around about the three or four, five percent mark, I can buy a property in my personal name, pay the low rate of interest, pay the Section 24 tax, and it's still cheaper than paying through a company.
So this whole narrative of always buy through a company is wrong. But it depends; if interest rates were to soar up to about 10%, then yes, a limited company would be a better route. But if they drop down, then personal name is better.
So it's not one size fits all anymore. You have to make a judgment call on where you think it's going to be, and you can save money by having it in your personal name.
Another advantage to earning in your personal name is it's completely anonymous, correct? For me, that's a big advantage because if all your properties are on Companies House and someone doesn't like you, they can cause no end of havoc.
Whereas when your properties are in your personal name, it's so much more private. It's the same as only getting a pension or a trust. Buying through a pension is completely anonymous; you could buy a hotel in a pension, and no one knows it's yours.
That's completely anonymous, which a lot of wealthy people, myself included, like. I can't say it; you don't need to be smart to be rich. But that's an advantage.
The big one that you taught me, which I hadn't even really considered until it came up, was the refinancing and living off of the capital growth. That's the big one, and you do that as well.
I do that. I remember going back 20 years now, 2005, a 10-day property course, which you know about. I remember listening to this person talking about how you can remortgage and pull out money, and I was thinking, wow, that's a tax-free income, big time!
It's a very simple strategy, so I've adopted that in my property journey. It's true; you can remortgage in your personal name and in a limited company. Both are tax-free.
The only problem with a limited company is if you want that money in your personal name, you can't. The only way of extracting it from the company now is by dividend or by salary.
If you want to reinvest in a limited company, yes, fine, carry on doing it. But in your personal name, that money is in your bank account tax-free, and you can live off the capital growth. You can do what you want with it, if you want.
A lot of people do. I mean, it's not necessarily something that I would tell people to do, which is to refinance and live off the growth of the portfolio. But to have that flexibility, if you've got a company, you can refinance tax-free.
You're not going to pay any corporation tax, but where you're going to get hit is with income tax if you then want that money to come out. So if you want to actually spend that money, unless you want it to stay in the company and reinvest the profits, you're going to have to pay income tax.
So it's down to choices; it's not one size fits all. As I said before, you can choose what you want to do. You can choose to live off the capital growth of the companies or properties.
What I would generally say to people, because a lot of people will spend ages thinking about whether they should buy in their company or in their individual name, my guidance would be: don't even worry about it.
If you've not got a deal on the table, it's an academic exercise, correct? What you really should be thinking is, what am I going to buy? How I structure it, whose name does it go in? My name, my wife's name, our names, a company, a pension, a trust? Figure that out later.
Find the deal, and you might want to have a consultation with someone like yourself, a chartered accountant. But finding the deals might depend on the deal.
You mentioned that one property where you worked at; actually, it's going to work out a lot more economical for me doing it through my personal name. But you're able to look at the particular property in question.
When you're buying a property, unless you're buying it from auction, generally speaking, you've got time. If you say to an estate agent, "I'm buying that house; it's going to be going in my name, Samuel Leeds," and then they give you the documents and everything, and then a few weeks later, when it's going through conveyancing, you think, actually, I think this will be better off if it was in my pension.
Then you can just say, "Oh, by the way, it's actually going to be going in my pension." It's an admin once you've bought it; now it's a big deal.
I went through a big exercise in 2019 where my whole portfolio was looked at, and everything that I own personally, we said, does it make sense switching it? By the time you take into account the consultation and potential stamp duties that you're going to have to pay, because it's not as easy as switching it.
No, it's not from your personal name to a company. It's a case of selling it, and if you're selling it, that's when you're going to trigger stamp duty. There are some ways around this, potentially, if you're with a partner.
But the question is, is it worth it? It's not for the small amount, especially if, like me, most of my properties are HMOs where you're bringing in two to three grand a month, and the mortgage is only 400.
Okay, I can't claim the mortgage payment back, so what? The cost of moving everything over, then having to pay higher rates because now it's in a company, and the interest rates you're limited on the lend as you can use, is it worth it? Probably not.
So I would argue that there's no right or wrong; there's no better or worse. It's about just saying, what are my situation, what's my circumstances, what's the property in question, and getting advice.
Don't hold back to find deals before you start. Don't think, oh, I need to get all this sorted now. No, no, no, go and find deals. If you put it in the wrong name, it doesn't matter.
I've got properties where I've bought, you know, I bought Riverford House, the castle in Samuel Leeds Limited, and then afterwards the accountant said, I know we do a lot through Samuel Leeds Limited.
Some people think Samuel Leeds Limited is my training company, but it's not. We package and sell deals; we did 30 deals last month through there. We loan out money; we've done developments; we've done the Lincoln site, all kinds of stuff.
But ultimately, it's not the end of the world. No, it's not the end of the world.
Another problem as well, I told you about the case with Pink, the band member of Pink Floyd. I think I vaguely recollect that. What did you make of the story? Do you remember?
I can't remember.
Okay, so a famous person, very rich, buys a property in a company, probably because he watched one of those videos online saying always buy through a company. He's like, oh, puts his guitar down, sets up a company, and buys a house through the company.
Then I think it was a one million pound house; it went up in value, and he decided, right, I'm going to sell it for 15 million, like a five million profit. When he went to sell it, he realized, oh, I don't own that property; my company owns it.
He forgot to file company accounts, and we know what happens if you forget to file company accounts: you get struck off. So the company's now been had compulsory strike off; it's gone.
He didn't even know. As far as he's concerned, it was just an administrative error. But now, because his company ceased to exist, he didn't own the property; the company did, but the company doesn't exist.
So the property was automatically transferred to the government, correct?
Yeah, so the crown. Now he's thinking it's his property; he's spent all the money on it; he thinks he owns it, but actually, it's owned by the government, and he's lost it.
It's one thing; if you've got a company, you've got to keep up to date with that. Oh yeah, I've had people say, oh, I haven't filed my confirmation statement. I said, well, yeah, you need to do it; you have to.
Generally, with a company, when I was a sole trader, doing my tax returns was a bit of a simple job, really. I could do it myself; it's just got to do your self-assessment.
Okay, what did you make? What were your costs? What's left? All right, you're going to owe this much income tax; no problem, ping it over. I'm probably the only person, though, that's exaggerated my earnings.
Yes, we all know about that.
I exaggerated my earnings to HMRC to pay more tax just so that I can then get mortgages because I'm a high earner. I don't know how old I was then; maybe 19, 20.
You were very young then.
Very, very young.
But yeah, another problem with buying through a company, and you've advised quite a lot of people, some of our deal sources and even our contractors, that it makes sense for them potentially to be a sole trader as opposed to a company.
Why is that?
It depends where they are. I think you can have a company; you can have a sole trader in your own name. If you're a basic rate taxpayer, it's not going to cost much; there's less administration.
When you start off a deal, something you don't know where you're going to go, you may sell one deal. I've had people come to me and say, I've sold one deal; I put it in my personal name. I said, don't worry about it.
Technically, it should be done this way, but don't cry about it. But then if you're selling loads of deals, then getting the company in, yeah, you want limited liability.
Do you think that there's a lot of people wasting money on accountancy fees for companies, potentially?
Potentially, when actually they're just starting out. I think a comment I'd make while I remember: a lot of people come to me and say Section 24 has hit them.
I've heard a lot of people say they've had to sell out their portfolio because Section 24 has pushed them over the limit. The problem is they never assessed their properties in the first place, and they never made sure they had the profit cover to start with.
You need to make sure you have the profit cover to start with. So if you're assessing a property, don't only look at the rate you're going to be paying now.
You may go for a two-year fix now; let's see what the five-year fix is saying. If the five years are predicting it's going to go up, then work on those rates.
So when the rates go up, think, all right, they've gone up, and you don't cry about it. They were making money from crappy little properties that were never good deals, but because money was so cheap and interest rates were so low, they were making 300 grand a month.
Then Section 24 comes in, interest rates go up a little bit, and now they're making nothing or even making a loss. But they should never have skipped the crash course.
Correct.
So it's really helpful. Thanks, Tim.