There is a lot of confusion and misinformation about this!
Our first suggestion is to talk to a good mortgage broker. Depending on your circumstances, you may not be able to get a mortgage in a company and thus you will have no choice but to invest in your own name initially. This can make the whole “Do I need a company?” discussion a very short one!
On the basis that you have spoken to a mortgage advisor and have been told that you are able to get funding in both your own name and in the name of a company, then there is a real question to consider as to which is better for you – own name or company.
This article is by no means exhaustive and is not aimed at offering you advice – it merely tries to make you familiar with some of the key issues and questions that need to be asked or considered.
A Brief History
Before the Summer Budget of 2015, you could only get mortgage finance in your own name (unless you were a high net worth individual and had a good banking relationship with a bank). With the announcement of what became known as Section 24, there was then a push to buy in a company as these were unaffected by the Section 24 provisions.
It is also worth knowing a little about tax rates. Companies pay tax at 19% whereas individuals pay tax at 20%, 40% and 45% (in simplified terms).
Meet Jill
Jill is a city banker and earns enough to be in the top tax bracket. She loves her job earns enough to keep the lifestyle she wants paid for. She has no intention of quitting.
She is investing to supplement her pension, have more control of her retirement and finances and is wanting to benefit from property through leverage, income and capital appreciation.
For Jill, a company is the ideal investment vehicle as it can claim the interest cost in full as well as only paying tax at 19% on profits. If Jill invested in her own name, she will pay tax at 40% or 45% as well as be subject to Section 24 restrictions. Profits are subject to less tax and thus over time there is a fantastic compounding effect to this.
Meet Jack
Jack works part time as a cook at a greasy spoon. He hates his job and is looking to get into property full time and live off the rental income.
The little income he has currently from his work will fall away in time. He thus has a lot of headroom before being subject to either Section 24 or the higher rate (40%) tax bracket. Any income he earns from the properties he is looking to spend on meeting his lifestyle costs.
In Jack’s case, investing in his own name would probably be the better option. He is not subject to Section 24, he is able to spend any money he receives and he doesn’t have the costs of running a company to deal with.
What about you?
Jack and Jill are extreme (and simplified) cases of investor situations. Most people are a bit of a combination of Jack and Jill in various proportions.
Your current income, your future career and property plans, lifestyle costs and changes, etc all play a role.
And then, just to complicate matters a bit further….
A warning about Jack
While Jack has capacity to acquire a few properties in his own name, if he down the line finds a fantastic job that he really wants, it may then put him in the situation where the properties in his own name push him into a hight tax bracket and also cause Section 24 to come into play.
Just because something can be done today doesn’t mean it is the right decision – you need to look down the road to see what lies ahead and whether it will still be the right decision down the line.
A note about Jill
Just be aware, that for a company you might pay tax twice.
If you pay yourself a salary or take interest on your loan account, this is a cost to the company and reduces company profits and taxed.
However, if you take dividends, the company first has to pay tax on it’s profit and once this is done, you can then distribute the profits in the form of dividends. You will pay tax on this – although at a much-reduced rate.
The optimal time for Jill to take income from the company is after she has stopped working for the bank and her salaried income ceases. She can then, subject to the profit in the company, draw a salary, interest or dividends (or some combination of these) from the company in a very tax efficient manner. It is a bit like a tap and she can control what gets paid, when it gets paid and how it gets paid such that the least amount of tax is paid overall. With some basic planning this can be very efficient.
