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Optimum Professional Services are delighted to launch the new monthly conversational series, “Optimum: LIVE!” which will provide the opportunity for you to hear from members of the Optimum team and special guests each month as they delve into a variety of subjects in light-hearted, fire-side chat style productions.
Each episode will be shot or broadcast live (yep! One take!) which means that it is not scripted or edited and has a more natural and engaging tone.
This is a https://www.visual-pr.co.uk production
00:02:51:29 - 00:03:20:19
Unknown
Welcome back to Optimum Live episode 18. The title is Financial Considerations for Your buy to let property, company or personal. The attention of this episode is to demystify a big decision for landlords whether to buy a rental property through a company or in their own name. Frequently asked question. Apparently, I'm being led to believe it's even more popular these days to to try and work out the options.
00:03:20:21 - 00:03:31:27
Unknown
And I'll be delighted that we're going to have Michael Blake in here. That will take us through all the things that we may think about when we're trying to make this decision.
00:03:32:00 - 00:03:50:10
Unknown
So, as I say, Michael Blake and. Hi, Chris. How are you doing? All right. Yeah. I'm good, thank you. I have a feeling that this was one of those ones going. Yeah, we need to cover this, but. Oh, my goodness, this is a headache. It seems a lot to it. I think I wrote a similar email three times last week, and it's like this seems a good topic to to bring up.
00:03:50:12 - 00:04:28:09
Unknown
Oh, pace, let's start right at the beginning. For anybody who maybe isn't sure, can you briefly, did you briefly explain, what we mean by I mean, it sounds fairly obvious, but renting a property through a company versus in your own name. Absolutely. So this is, for, renting for your, for yourself to live in. This is for buying an investment opportunity and renting it out to, Mr. Smith, let's say, and, earning a return and hopefully a capital appreciation as well on the, on the value of the house over a period of time.
00:04:28:11 - 00:04:46:16
Unknown
Some people use them as their unofficial pension funds. Go. And we'll, we'll, we'll get some rental so that then I'll live off the rental income in my retirement. Yeah. So there's lots of different ways, angles of people looking at some of them, look at them as a quick bit of income. In the short term, if they see that there's a property they can make some money on as well.
00:04:46:18 - 00:05:09:03
Unknown
Is it? I know that we're taking this, in the angle of residential property, but I've also seen people on commercial property where they potentially decide to do it as a pension. Yeah. That's right. So, so typically so a pension fund cannot own, a residential house or dwelling. So you can't nothing that can be lived in.
00:05:09:06 - 00:05:35:22
Unknown
It's just complete break of the rules of a pension scheme. So, so when you're working with your pension advisers and trustees and stuff like that, they'll be like, no, no, you can't do that. That the tax tax charge is horrible. So it's just a complete flat. No, it doesn't happen. But whereas a commercial property. So, if you've got, a business manufacturer and their pension fund, in theory, could, purchase the commercial, the factory, the warehouse, and only in the pension fund.
00:05:35:22 - 00:05:59:08
Unknown
And then the company rents it through, you know, through to, to to their pension fund. So it's a nice way of, owner managed business owners, shareholders, directors to use their own pension funds to benefit their business, essentially by getting that, that, that commercial property, whereas typically it's tied up in, in standard investments in there. And I know we have gone off topic of this particular one.
00:05:59:08 - 00:06:14:13
Unknown
But yeah, that's that is normally done the other way, isn't it, to benefit the business so that they can, that the company can have something, but it's not suddenly got a whole assets out there or something like that. Yeah, that makes sense. Right. I'll get us back on track because I went off on a tangent. It's good. It's good to know the difference.
00:06:14:13 - 00:06:32:17
Unknown
It is. Absolutely. So in other words, this is the, even if I, as an individual go, do you know what I want to get? I see a house up for auction or whatever it might be, and go, I want to get that and do it up a little bit. I think I fancy myself as doer. Opera. Yeah.
00:06:32:20 - 00:06:53:20
Unknown
That's what my wife calls me. And I want to do it and then rent it out. Yeah, I do have a choice of whether I personally go and find the money or whether I go actually, do you know, what would it be in my business, visual PR productions? Now? It would have to be a separate business.
00:06:53:20 - 00:07:22:02
Unknown
Typically, it's a it's a lot cleaner to be in a new, some people use a phrase SPV special purpose vehicle, essentially a new limited company. Okay. So it's it's typically done there. You have your trade over here. And that one stuff is in its own little box over there. So that so again, it's another company. But there's naturally if we if we're considering we talked before about the downsides of having extra companies and stuff potentially.
00:07:22:05 - 00:07:41:14
Unknown
But actually if if we're thinking it as an idea, there's got to be quite a few advantages, which there are. And we can go into those as we go along. But yeah, it is looking at where, where as best, there's some short term long term changes of tax rates, that need to be considered. Okay.
00:07:41:14 - 00:07:58:14
Unknown
And in which one you go down. Hence, I now completely understand what we do in an episode on this because I think it's probably overdramatic to call it a minefield, but there are a lot of things that need to be looked at, and it's not just taxing. So naturally we get asked, what's the tax changes and what's tax consequence?
00:07:58:14 - 00:08:24:10
Unknown
But Rob uses the phrase of the tax tell wag the dog. Yeah, but it is that so people get go all which is the best of the tax. But there's so many more things to consider that affect the decision. And again, it comes potentially down to whether you're looking for a short term gain or long term gain, because one might be more advantageous depending on which way round you go.
00:08:24:12 - 00:08:42:22
Unknown
And would another thing that would impact this is whether I've just gone, oh, there's a house that's that's a decent value, and I think I can do something with it or whether I'm going to do multiple properties. Yeah, yeah. So yeah, it is. And so, so quite often when someone to phone up and go, which what am I doing?
00:08:42:25 - 00:09:04:11
Unknown
I'll go hang on. Minute 20 questions. First we got to find out what the motive is here. And like, say the ones who are trying to build a big portfolio, they tend to fall down the line of a limited company, because of various reasons. So we'll, we'll go through those and hopefully we can help sort of iron out some of those queries, or at least then when when a client does phone up they go.
00:09:04:12 - 00:09:23:04
Unknown
Actually, we're looking through I think this because of this, this, this and this. Do you agree. And we'll still deal with those calls and emails and stuff. It's just a how try and how help to get the clients to understand why we're asking all these questions rather than just being, oh, here we go again. He's asking leave the questions is actually this is the knock on effect of that one.
00:09:23:04 - 00:09:47:08
Unknown
This is knock on effect of that that answer. Yeah, absolutely. And just so everybody knows, we're going to be covering things like stamp duty, interest rate, charge tax of interest rate and exit, capital gains tax as well. So when you come to sell it, all of those sorts of things, how much more popular is it becoming for landlords, to use a company structure instead of personally?
00:09:47:08 - 00:10:14:19
Unknown
And why? So it, it pushed on a few quite a few years ago, probably five years ago, when the, the tax regime for individuals changed on rental properties. So something was brought in court, to get basic tax relief on your mortgage, rent or mortgage interest. So, if you. So the basic principle for an individual is rental income less cost.
00:10:14:21 - 00:10:32:23
Unknown
That whether that's management fees, repair costs. If you had a bit of empty property council tax kind of those costs. Right. Will come in and then you would times that that will get added to your other income. So whether you got employed income dividend income and bits and then get charged at your applicable tax rate.
00:10:32:23 - 00:10:54:17
Unknown
So that could be 40% if your tax rate had higher rate. Taxpayer. Yeah. And then however much you paid in, in mortgage interest, that's not the repayments, that's just the interest. So if you want a capital repayment most on but if you were you could only have the interest element okay. And it's that times 20% your basic rate tax relief.
00:10:54:19 - 00:11:15:27
Unknown
So in theory you could have a pound of rental income charge £0.40. So 40% £0.40 tax 1 pound of mortgage interest. So in theory you've made no money because you had a pound income of paying down. But you only get £0.20 saving on your interest rate. So therefore you charge for what you pay. Yeah. You take off the 20 PE for the interest rate.
00:11:16:05 - 00:11:53:28
Unknown
You still got a tax charge of 20 PE, even though you made no money. Right. And that's what changed. So because of that change that made people look at limited companies, because you don't have that rule in their limited company. So pound in a pound out zero. No tax bill in those circumstances. So lately with the interest rates and everything as they are, we're seeing a lot of situations where individuals actually lose money in the short term for having a rental property by the time they take into account how much spend on the rental, less so paying out cash out for the interest, cash out for a tax bill because they create a tax
00:11:53:28 - 00:12:12:22
Unknown
bill because of those rules. Yeah. So that so that period of time was driving people more into a limited company. Okay. So the old question you asked, five minutes. Okay. So yeah. So that's the reason why it's become more and more popular. Yeah. But it's still a discussion and something that still needs to be looked at as an automatic.
00:12:12:23 - 00:12:29:29
Unknown
Oh. And so, you know, there's a whole like say I used to say 20 questions. Yeah, there is probably loads of different circumstances that pushes people down like which way. And it could be how long they expect to keep them, what they want to do. They need to live off the, the rental income or whether they reinvest in it.
00:12:30:01 - 00:12:48:16
Unknown
Because if you need to, live off of it and you have to top up your income, then individually, whilst you might have this extra, tax charge in in the short term, if you got in mortgage interest and you happen to be a higher rate taxpayer, but once you've made that profit and paid the tax, that's you.
00:12:48:20 - 00:13:09:08
Unknown
Yeah. Whereas in a company we pay 25% corporation tax on the profit, then you're going to pay dividends tax to take it out. Yep. So then you might end up paying a double tax charge here to live on. So these are things that we start to consider. We start having to weigh the pros and cons against which which which approach okay.
00:13:09:13 - 00:13:40:18
Unknown
Hence the 20 questions because. So if you think of that scenario over here you're paying largely 40% tax. But in a limited company you might only pay 25% if you're looking to reinvest, but put more deposits down to buy more properties, to build a portfolio, naturally, you're going to have more properties quicker or more deposits quicker with a limited company because you're only being charged 25% on the full lot, not 40%, and not getting all the tax relief off the NHS.
00:13:40:21 - 00:13:55:19
Unknown
All right, so this one could speed up the returns into a limit to come into deposits with the limited company. So again so sometimes people come to me and say I'm buying one now I want to buy one next year. And then as soon as I can I want to buy three or 4 or 5, and I want to get to ten by the time I'm retired.
00:13:55:22 - 00:14:15:22
Unknown
Right. So that one will start putting the needle over here. Go. And we need to look at a limited company because of that cycle. But then that would be question one or that would be scenario one like on a tree diagram, like we're going off that direction we're heading there. But then it might be yes. But then I want to sell them quickly or do this or do that.
00:14:15:22 - 00:14:32:20
Unknown
And then it's like, oh, why don't we come back over here. Yeah. So hence there is that what's your your goal? I mean is it short term. Is it long term. Yeah. And that does make sense. It can change. And that was one thing that was coming to my mind as you're explaining that is that I sit there and go no no no I don't know.
00:14:32:20 - 00:15:00:25
Unknown
Yeah I've not done this before. So I'm just thinking one. And then you suddenly go, well, actually I quite like this. And then you start adding more and more. Can we change? You can typically you would change the new ones, not the existing ones. Yeah. Because the existing ones, you're going to typically most, most cases you're going to pay stamp duty again to for the limited companies buy off you personally or you to buy it back out the limited company.
00:15:00:27 - 00:15:26:11
Unknown
And at that point you crystallize again for capital gains. So if you bought it for 350 and you sell it, the market rate is three, seven, five, you got 25 grand the gain. So you got capital gains tax build off of that. So what it speeds up so typically. So someone's going to have a really good reason for wanting to move it from you to you via a limited company because you're creating these tax bills.
00:15:26:13 - 00:15:45:00
Unknown
And depending on circumstances, there are people out there that tell you, you could do it without all those jumps and stuff. Yeah, still a little dubious over those ones. And again, circumstances, those are they apply more to ones who've got multiple ten, 15 something that looks like more of a full time job going on, rather than one that you have an estate agent on.
00:15:45:06 - 00:16:03:03
Unknown
What you do is go, oh yeah, 950 came in last month. Lovely. Yeah. Yeah, yeah. So but again, that's that's one area we don't want to go down into this one. But that, that does is some consideration. Yeah. No that makes sense. And of course we've still got which I assume still has to have maths done on it.
00:16:03:03 - 00:16:23:11
Unknown
Is that my, you know, my bone of contention, the associated businesses. And I'm not going to take us fully down that rabbit hole. Got an episode on that one. We have to go back and watch a previous episode. But in its shortest sense is that what's the what's the threshold before you got 50, 50, 50 K profit?
00:16:23:13 - 00:16:44:15
Unknown
Yep. But if I start up, another business is now 25 K in each. Yeah. And if I had a third, it's actually, you know, that's exactly between three. Exactly. Exactly. Yeah. And and so that has to come into the equation. But it sounds like I don't have a choice there. I couldn't put it in this vehicle to have just the one company.
00:16:44:18 - 00:17:07:26
Unknown
So what tends to be the driver of that one is the mortgage company. So because the mortgage company doesn't, is more risky to a mortgage company to have a trade that could go insolvent with an asset that they've got a charge on now, they've always got a charge. So it's always but it's it's messier, whereas it's exclusively over here.
00:17:07:26 - 00:17:23:19
Unknown
You know, they've always got that this is a cardboard box that has elements coming in. And that's what they have the charge on for them. It takes a lot more boxes. So again, whilst in theory it could work, the mortgage company might block it. And then when you're borrowing someone else's money you got to play by their rules most of the time.
00:17:23:21 - 00:17:46:20
Unknown
Fine. Okay. Right. Let's pick into these a little bit more. Let's start with, stamp duty. Stamp duty? Yeah. Are there different stamp duty implications, whether you're doing it company or personal? No. So long, on the basis that you already own your own home and as an individual. So you've already got one, and then you're buying an additional property, right?
00:17:46:23 - 00:18:08:24
Unknown
So on an additional property, whatever the stamp duty rates are, you got an extra 5% charge on top, even if it's by to let buy to let. Yeah. So so in theory there's no difference. It's a very rare circumstance where you have someone who doesn't own their own home and they're buying a rental property. Yeah, right.
00:18:08:24 - 00:18:26:21
Unknown
So let's ignore that scenario because that is very, very rare. You so yes, there is additional stamp duty so on that we could, we can have a look at an example, but like on a, on a 300 grand house. I think earlier it was about 20 grand, the stamp duty that you'd have to pay. So, so we it's one that's it.
00:18:26:21 - 00:18:47:04
Unknown
So you can go onto the gov website and you can go in stamp duty calculator and it comes up with this screen. So if we were to do a generic purchase so let's say a freehold purchase and then it comes up are you buying as a nonresidential. So so transaction so residential because we're looking at, a house that you would live in.
00:18:47:07 - 00:19:12:29
Unknown
Yeah. Effective date, let's put the 30th of June or 31st of July. Yeah. Because it's got it saved that lovely, lovely. Perfect. And then so this is if you were overseas buying into the UK. So when where, Where. No. You came. Yes. Yeah. The double. No, no, we're not a non UK. Well, and then this is where you, it puts you down.
00:19:12:29 - 00:19:29:20
Unknown
Are you a limited company or individual? However the outcome. So if we are, we'll go down the individual route because you haven't seen this bear and this this or talks about whether you've got an additional property or what I see. So if we go, yes, yes, as an individual.
00:19:29:22 - 00:19:59:07
Unknown
And then we'll result in two or more properties. So yes, because we've in this scenario we got our own one and we're adding another one. So yes. Is it replacing your main residence this new one. No. Because we're going to keep our main one right. Okay. So then we put 300,000 in there, and if my magic we scroll to the bottom, just check the answers that you're happy, which I am a we are 20,000 pounds buy in that 300,000 pound house.
00:19:59:10 - 00:20:15:00
Unknown
Okay. So table up front, up front. On the day when you, hand over the rest of the money. Wow. Okay, so. And if you had gone down, limited company rate still would have been 20 grand. It was. Yeah, because when we spoke about this before and you showed me the example, it was still we went down. That's it.
00:20:15:00 - 00:20:46:11
Unknown
So so that again that's a consideration needs to be done when looking at a rental property because. So most scenarios you're going to have a mortgage okay. We weren't going down mortgage rates yet. But so typically most scenarios you've got about 70% mortgage a 30% deposit. Yep. So you work with your brokers on that. So but when someone's looking at being able to someone you've got to come up with the 30% deposit, stamp duty legal fees and searches.
00:20:46:14 - 00:21:13:06
Unknown
That's your contribution at the start. So again, so 300,000 pound house. Okay. So if it's say 75, 25% deposit, just keep the maths. Nice. A 75 grand plus 20 grand stamp duty, 95 grand searches, maybe more broker fee, mortgage fee. You might just round up with a nice five grand as 100 grand to buy a French grand house.
00:21:13:06 - 00:21:28:28
Unknown
So when people think of the headlines or you need a 25 or 30% deposit under grand on a three inch grand perch, is that actually a third? Yeah, because when you add the other things into it. So again, where is that money coming from? Has it got to come from your trading company. Have you got a pulse Max.
00:21:29:01 - 00:21:48:13
Unknown
Have you then got an extra dividend tax over there because you already taking 50 grand, but you need to take 38 to pay for that deposit. Yeah I there's those can scenario that you've got to consider that all comes into it. Whether it's worthwhile or not because that's your short term costs. So if you've got all that cost going out now, what's the benefit.
00:21:48:13 - 00:22:05:22
Unknown
How much am I going to gain me in in the long term. And so it's a crystal ball of how much house prices are going to rocket or not and build. Are they going to build more than having cash in the bank, say, for savings or whatever? You're a financial advisor, right? Until right on. What's the likelihood of it being empty at all?
00:22:05:25 - 00:22:22:15
Unknown
Yeah, yeah. All those comments, percentage of like what's the chances of the tenant smashing up the kitchen and you don't get it all covered on insurance? I've seen we see all these examples happening time and time again with with with landlords. And so they've got to be factored in. It's rare that you get someone like that.
00:22:22:15 - 00:22:44:12
Unknown
But there are always those costs. So then you go, well, actually I've got a tenant and it's doing quite nice, but is it, is it okay now you've got obviously other clients that do the property management bits for you, that can look after all that and keep things running sweet for you. Yeah. So it is just you can they can mitigate some of those potential costs if you got bad tenants in there and stuff.
00:22:44:12 - 00:23:09:28
Unknown
And that's what the estate agents, for to try and that the clients and stuff. So again all those factors need to be pulled in to be understood, to be understood, to see how good an investment it is for yourself. Makes sense. You're talking about these expenses. And I don't believe we're going down another rabbit, Warren of the mortgage sort of thing, because that's probably a whole other topic.
00:23:10:00 - 00:23:28:28
Unknown
In itself. I might be wrong and you might take us down that. Oh, yeah, we do talk about interest rates, but. Yeah. I was very briefly going to touch on your telling me that I would go and I use myself as an example. Not that I have any intention of doing this, but I've got visual PR productions, we do video content, blah, blah, blah.
00:23:29:01 - 00:23:47:13
Unknown
And, do you know what? I'm going to get involved in this. And I might have, you know, two, three, four whatever properties that I already have got my eye on. I you're not saying is that. No, it would be a separate company. Yep. How would I be granted a mortgage when the mortgage company is going to go?
00:23:47:13 - 00:24:17:08
Unknown
You've just set this business up. At the end of the day, you as a director personally guarantee and, the, the payments. So typically what happens. So on the other side the business within on the legal side he and need to do, what we call elms, which is independent legal. I sorry, independent legal advice. So they would be they would sit with the director who is, signing up personally to make the payments.
00:24:17:08 - 00:24:41:12
Unknown
So it kind of then whether it's in limited company or not, puts you on the same footing as an individual buying a rental because you personally, committing to rental payments, even if it's there. So it's that gives them the confidence can excuse me, can that then change and I apologize. I know I always apologize for asking silly questions, but hopefully the idea is what some of your viewers might be thinking.
00:24:41:18 - 00:25:07:06
Unknown
But equally, I it I'm conscious, I take us down rabbit war. And so I hope I'm not going too far down a wrong direction here. But can that then change that suddenly says, do you know what? I don't need, me to be a personal guarantor, a guarantee. I, I don't I think it's rare I, as the company is making enough money now that says actually remove me from this equation now.
00:25:07:11 - 00:25:31:14
Unknown
But why would a mortgage company agree to a. Because they owe you. Because the company is making enough money that they're reducing their security by taking you off. So therefore putting their investment risk portfolio up. So that's not something they would ever change? I don't think so. What about if again, it probably is mortgage specific. Different brands, different companies might might have different requirement and, but typically with one.
00:25:31:14 - 00:25:51:09
Unknown
So like we get clients who go off and get do that and then they'll need to get independent legal advice. So they come in book me with the. And so quite a lot of the time it is it is happening. Okay. And I guess in my mind I was also there again. Okay. But visual PR productions has some a cash pool that says, you know what?
00:25:51:09 - 00:26:14:29
Unknown
We're going to put that I don't know if let's say you 100 grand that you said, yeah, that 100 grand is going to be put straight in here. I have no idea whether that's even doable. Yep. And then the mortgage company turn around and go, all right. And do you know what is. And that's it. So they kind of in this size have a double, double security because they got the fact that you've put, you've put in a big deposit.
00:26:14:29 - 00:26:36:19
Unknown
So therefore I think in there I say they would look at it with common sense and go, they could fire, sell it and still get their money back. Right. And then if not, they're still going to get you to guarantee making sure they're always me. So like for them, that's why. Right okay. And at the end of the day, whether you agree with it or not, my view on the common sense side of things is it's their money.
00:26:36:21 - 00:26:52:26
Unknown
They don't have to lend it to you for sure. They don't make money. Granted, if they don't lend it. Yeah, but they're not. They're going to lend it in the most secure way that they can possibly be because they make money on it. Yeah, absolutely. And so like a lot of scenarios will come down to what your mortgage company saying, what they allowing you to do.
00:26:52:28 - 00:27:09:11
Unknown
It might make right. It might be good on paper. But if you don't do it, if you if you cancel it by their rules, you can have their money. Yeah. Which is understandable. Okay. That may be your broker's. So they may look in whether I could afford it. Then that's what I would then need. Yeah, a little bit.
00:27:09:11 - 00:27:27:00
Unknown
Yeah. I don't know. I don't know how far down that road they go, whether they're checking your put. But it largely is done on what mortgage, what rentals are done. What you achieve from when I work with the brokers and stuff that is looking at what the mortgage, what the rental payments are going to do. Will that more than cover?
00:27:27:02 - 00:27:47:23
Unknown
Yeah. Of course. No, the with the, with the how much risk are we taking because it might be empty for two months in a year or whatever they choose to do. Okay, fine. So it doesn't affect how much you pay upfront whether we go personal or company. No, it's the the subsequent knock on of the tax to do so.
00:27:47:23 - 00:28:04:21
Unknown
So if you need to pull that deposit from your company, you got your to buy individually. You pull extra dividends from your company. So you got your extra income tax. Now if you've got money sat in a limited company quite often, you could do an inter-company loan to another company to enable them to to purchase a deposit.
00:28:04:28 - 00:28:32:17
Unknown
Some mortgage company still get, their heads around that and get a little confused with the situation. So again, some it doesn't always work, but in theory one company can loan another company money and therefore it would save you pulling out and paying dividend tax. Got. Yeah fine. Okay. Next one. And I said we weren't but and then realized we were mortgage interest being a big consideration.
00:28:32:20 - 00:29:00:24
Unknown
How is mortgage interest rate. Interest tax relief. How does it work differently. Sorry. For companies over individuals. Apologies if yeah. So there's there's there's two bits and there's one like the things to consider is so on the mortgage rates. And again last worked on one with a with a client and that broker. It was about 0.7 percent higher than if you're buying your own home to live in, buying in your own name a rental property.
00:29:00:24 - 00:29:26:24
Unknown
It was like 0.7 percent higher mortgage rate. Okay. So that's a financial cost to consider each year. And then a limited company would be a bit more again. Right. So again, this is where they have their cake and eat it again for security. And they're charging a bit more for it. So again those considerations in your own name in the company name you're going to pay a little bit more mortgage rates typically in a limited company.
00:29:26:28 - 00:29:47:21
Unknown
Okay. Speak to your broker, see what you can what you can get. You can run, scenarios past them to see what it comes out with. But that is typically what we're saying. When, when, when they send the clients in through their mortgage statements for the year, they're losing a little bit higher on a limited company. Okay.
00:29:47:23 - 00:30:10:26
Unknown
Does that tax. Yeah. So then that like say the next bit is a tax. So that's that's up. Yeah. And that's the bit at the start where we talk about how it works. So so yeah, so on a, on an individual, you total up your mortgage income. Yeah. Sorry. I hear these are interchangeably wrong with your rental income.
00:30:10:26 - 00:30:34:02
Unknown
Yeah. Less any estate agent fees, including the that because you're not going to be that registered for this. We're not going to go. Why. But you're not okay as an individual. Right. Fair. And less your gas safety certificates, less your insurance landlord's insurance. Maybe less the fee to do your tax return of that for the rental property, less your repair costs.
00:30:34:02 - 00:31:03:02
Unknown
If you had to replace something like your, the carpets need replacing, the walls need redecorating. Oil is gone by. Yeah, the fences need to replace and repair. And so those costs, you get to them your rental profit. Yeah. I we've not talked about mortgage coming off yet so and that's right. So this is just that you add that on to whether you've got employment income banking interest income dividend income.
00:31:03:09 - 00:31:28:09
Unknown
So on your this all forms part of your tax to add it on. Yeah. And then you do your tax calculations based on that. Yeah. So whether you have 20% or 40% on all that put it in fine. That comes out with a tax bill. And then however much you pay in mortgage interest you deduct 20%. So for people who are a basic rate, taxpayers see no change to their tax returns.
00:31:28:09 - 00:31:45:25
Unknown
With this new rule. I say new rule by 5 or 6 years old. Okay, right. But some people are still are that I speak to new clients are going, oh, I didn't realize that he's a client. So the council has obviously just been banking on doing it right, but just not telling them. That's why the tax bills don't.
00:31:45:26 - 00:32:04:10
Unknown
I'll tell you. But so that you've got that and then where it's like we talked about limit company. You've got you get to the same position, you get to your rental profit the same as individual, but then you take off your mortgage interest and then that's the profit that you pay 25% on in a company. Right? Yeah.
00:32:04:11 - 00:32:31:23
Unknown
Yes. But so, so typically if you're a higher rate taxpayer you're going to pay more income tax in, in the in the today tax. Yeah. Yeah. As an individual than you will as a limited company. So that one is a tick in a box of company. Yeah. And then it works out how much. Because if you've paid more mortgage interest then that becomes the your tax bill might be less, but you might have paid out more for your mortgage.
00:32:31:25 - 00:32:49:01
Unknown
Yeah your product fee might be higher or something whatever. And those those start coming into the things when you run in essentially that the only way to do if you're trying to base it purely on numbers is you go, right. Scenario one is you buy yourself this, this, this is the cost. Is this all the way down to the bottom?
00:32:49:01 - 00:33:10:11
Unknown
Yeah. It's not a two. It's limited company. Right. So that's the mortgage rental income okay. This is the mortgage interest. That's the tax bill. That's what's left over. Which one's looking better okay. And you guys help. Yeah. We can go through with that. Yeah. You go. Does that need to be after a mortgage offer or at least an indication you you'd go to your broker and get an indication.
00:33:10:11 - 00:33:26:18
Unknown
Of course, because at that point you don't know whether you put in a limited company or not. So you need some hypotheticals. Do they do that? Would they provide hypotheticals? I would have thought so. They could they could give you some examples, some sort of figure. Because you can always get a mortgage. In principle they will for yourself.
00:33:26:25 - 00:33:45:18
Unknown
And so I don't think is any different for a limited company, whether it's been formed or okay. So but again that's what's the idea of speaking with them and talking to them. Tell them what you're up to so they can understand your absolute situation. I'm still recovering from stress, from buying our own house so that scares the hell out of me.
00:33:45:20 - 00:34:10:00
Unknown
Okay, so basically stamp duty nil, nil. Yeah. Between personal. Yeah. And and, through a company mortgage interest, or tax on a mortgage interest is one nil to company. Yes. It's better because it's cheaper. Yeah, yeah. Okay. Now, I might go off on, you know, around a little bit. How do the income and profits.
00:34:10:02 - 00:34:30:07
Unknown
You might have already told me that to this to be fair, from rent or properties get taxed in the company. And how does this compare? I think that is what you said last year. 25%. Yeah. Yeah, yeah. So it so if your basic rate taxpayer individually that's where that you they'll be better off because they'll only be paying 20% tax on the profit.
00:34:30:07 - 00:34:50:02
Unknown
Whereas in a company B 25 okay. So again personal that's where them will start going into review in your personal income. When you're looking at it to go, you higher rate, are you likely to be a higher rate for how many years? You got a higher rate now for a year. But actually in two years time you're going to start one, and then you'll become basic rate.
00:34:50:02 - 00:35:08:13
Unknown
So you'll have a time. And it's all these things. No, no one person that will go through will be in the same situation, the same time scales and everything. Which is again why it comes back to that. 20 questions. And I joke with clients. They go, oh, should I buy an unlimited company or not? I was like, let me get my questions, then let's go for them.
00:35:08:13 - 00:35:31:14
Unknown
Yeah, because that they're is going to be different. And and also like it's also trying to predict that future if you'd like to do change. Yeah. So like there's there's nothing stopping the tax rules change again in the company. But you've already got it in there. And like we talked about you can't take it out easily. So it's one you have to make the best idea, the best judgment with everything you've got in front of you.
00:35:31:14 - 00:35:48:06
Unknown
No. But has a good chance it could change like a load of people bought them, didn't know that the interest rate was going to change, or the tax rate on the tax on interest rate was changing as an individual. So if someone that didn't know that two years before, they might have gone off, I knew that I would have put it in limited company.
00:35:48:06 - 00:36:09:11
Unknown
Yeah, there's nothing you can do. They're just the unfortunate few that get caught and picked up by it. Yeah, yeah. You can't see. You can't predict the future on things like that. I mean, again, I'm not going to go down this rabbit hole, but that people are screaming out, go and stop making people provide in rental properties so difficult because there isn't sufficient rental properties out there.
00:36:09:12 - 00:36:33:08
Unknown
Yeah. And you'll get people you screaming out from both sides. You like going you go, you go. Oh the the pulling, the mopping up the lower and typically the lower end of the market. Yeah. The people were the first time guys so they can't get on the ladder. So therefore landlords are bad however. Yeah. Also there's a load of people that can't even afford to get on the ladder because they can't get the deposits that need somewhere to live, so therefore need to rent.
00:36:33:08 - 00:36:51:08
Unknown
So if the rent is on there, then they've got nowhere to live. So like you could sit down and go I could argue six for six against. And oh and it and with anything it's a balance. You need a you need a mix of everything. Because I got a friend. He, he's never in the house. He's what, 38 now?
00:36:51:08 - 00:37:15:06
Unknown
And he's just he's just moved around because he likes to move around the UK. You're living somewhere for 2 or 3 years, do work. He's got a remote job, and then you go move somewhere else for a bit and just go and move around. So if he if he lived in a place and kept buying his own house, he will pay an thousands in stamp duty, which would be way more than the benefit you'd be getting of the the house price going up wouldn't work with solicitors fees and all that said and done to time.
00:37:15:06 - 00:37:29:02
Unknown
And then you got to try and find someone like it. Yeah. To sell it. So if you're. Oh no, actually I'm going to go up there in six weeks time. Oh, I can't find anyone to buy my own. Yeah, yeah. So, so he he likes the fact that you can rent and you can just go get a flat or a house or whatever.
00:37:29:04 - 00:37:52:11
Unknown
So it's remembered there's always another side. Appreciate there's a lot of people that do mop up the market on the rentals and they seem like, say, call it. Yeah, and they mop up a massive amount of the market. So again, it's just you're seeing it being being having your eyes open and looking at both sides. Well, so we said stamp duty was a draw.
00:37:52:11 - 00:38:11:05
Unknown
I think interest rate charge is probably one point to personal because we said it's a little bit higher through a company. Yeah, it's almost like half appointed because it was not a massive difference. I know it depends on mortgages. True. Yeah okay. But tax of the interest rate is better for the company. So we're kind of at a draw to some extent.
00:38:11:05 - 00:38:40:06
Unknown
Now let's let's call it one one, which means the kind of the final big topic area to touch on is exit capital gains tax. So, when it, when you decide you're going to sell that property on what's the difference in capital gains implications. Yeah. Between company and personal. So individually, say when you sell a property, say you sell this example, we had 300,000 pounds.
00:38:40:06 - 00:39:07:15
Unknown
We sell it for 350,000 pounds. Yep. Okay. So you take individual you take the sale price. Yeah. Less the selling cost. So estate agent fees, legal fees for selling less the purchase cost of the property. So 300,000 less the purchase associated costs, stamp duty legal fees. By him. Okay. So you get ten to a profit. So let's say that profit was 20 grand.
00:39:07:19 - 00:39:31:18
Unknown
Yeah. Okay. If that's in your own name, you take off your tax free allowance for, capital for capital gains, which is your annual exemption amount. Yeah. Which is now only 3,000 pounds. Used to be 12,000. Transcript. Okay. So you get your 20 grand profit, take off your three. Okay. You got 17,000 pounds. That's taxable gain depending whether you're higher rate or not.
00:39:31:21 - 00:39:59:27
Unknown
We're paying 24% tax on that for higher rate okay okay. Yeah. So you pay that you pay that within 60 days you do separate capital gains return. Then it goes on your tax return. Right okay. Fairly simple okay. Limit your company similar basis okay. Same process of working out what the gain is. Yep. Charge you at 25%. Corporation tax for capital gains okay okay.
00:40:00:00 - 00:40:20:10
Unknown
However it's the next bit. The money still in the company. It's not in your own hands. Whereas as an individual when you page capital gains tax it's in your own hands. You've got that money. It's been tax. It's all in your pocket. Go down the pub, spend it. Yeah. Yeah. Over here in the limited company you then have to pay a tax to take it out.
00:40:20:12 - 00:40:45:15
Unknown
Now you might pay depending on how much it is, you might pay dividend tax. Okay. So that could be if your base rate taxpayer 8.75%. Yep. So your 25 we had 24. Now we got an 8.75 tax coming out of the company. All right. If you got a big gain all right. You might not want that as income tax because that might put you at 33.75%.
00:40:45:15 - 00:41:07:05
Unknown
Right. Because a higher rate dividend tax. So then you might go actually I need to liquidate the company. So you got them pay, somebody to liquidate the company to get a capital distribution. 24%. You check that one, but it's that sort of thing. So you got in this company, you get in this double tax.
00:41:07:05 - 00:41:24:01
Unknown
Now, we talked about this sort of double taxing at the start with if you need to live off the rental income because you pay your corporation tax. Yeah. And then you're paying a dividend tax. Take it out. And it's the same thing with when you sell it. Because you've got the company the money's in there that you've made off of selling it.
00:41:24:03 - 00:41:41:03
Unknown
So again if it comes down to you can only have it for two, three, four years. Maybe you want you want this individually so you don't get caught by this double tax. Yeah. Right. And again this is what comes into it is the longevity of the investment. Is it something that you're going to have for forever. You know looking to sell.
00:41:41:05 - 00:42:01:08
Unknown
Therefore that would maybe make it a bit easier to be in a limited company if the other factors were good because you're not selling it. So you can't compare these two. But if you go, no, actually I'm going to do this for 3 or 4 years. So you're buying, you're renting, you're buying a house for your son's university and you rent night all the, all his mates and he's paying you rent.
00:42:01:10 - 00:42:16:26
Unknown
Yeah. They're all paying rent or market rate rent. That is, And then he moves on and then you go, right. Brilliant. He's done that. I'm going to sell it. Right? Yeah. You'll probably be back over here as an individual buying it rather than limit company. So you don't pay the double some you double double tax on it.
00:42:16:26 - 00:42:38:01
Unknown
Yeah. So again it's another thing. Get your crystal ball out. What are you looking at. What's the what's if you what's the lifestyle of that link. Longevity of this investment okay. Yeah. Which does seem challenging because I can very much see people, the other users, a great example actually, of like, yeah, my, my child's going to university.
00:42:38:03 - 00:42:54:03
Unknown
You know, I'm going to get a house and they're renting back and then they suddenly go, oh, actually this is quite good. This I'm going to do more. Yeah. Oh, I'm going to get a whole load of student rents because it's really. Well, yeah. And then suddenly you and you as you said, just leave that one as is from now on, the revenue at the other side.
00:42:54:03 - 00:43:12:20
Unknown
Yeah. And so it's just it's been, it's been just on like forward thinking as much as you can with these words to see what, what the snow looks like. Although being a motor racing commentator, I'm loving that split strategy idea. You know, that bit of this. Bit of that. Yeah. Exactly. Yeah. Covering all options and Okay.
00:43:12:20 - 00:43:39:08
Unknown
So so which way did we end up going with that one. And it was that one to personal spends on the I love how many how long it is. So you can't. So with any of this you won't get to a point where we'll go. It's definitely one or the other. Right. So there's, there's one thing that, sort of has been going through, I've thought of this actually, and it's become an incredibly important nowadays, which I think I'm going to take it down the street, you know, it's not on your notes.
00:43:39:10 - 00:44:04:18
Unknown
And it's it's fine. You're dangerous about that. So it's fine. Keep you on your toes. You say, and it's a it's a phrase. It's used more and more popularity of a family investment company. All right, so it's where you've got mum and dad is perhaps has got the wealth. Yeah. And and that and is forward looking into inheritance tax planning or future sort of passing the money down the family tree.
00:44:04:21 - 00:44:25:11
Unknown
And it's a way that we can work with setting up a company in a certain way so that, mum and dad's wealth is used for the children, but the mum and dad still get a return of income, and, in the short term, so that they don't give away everything, but they still get return. But they're not getting caught up with inheritance tax with gifts and stuff.
00:44:25:11 - 00:44:59:05
Unknown
Yeah. And it's something that the last six, seven months it's been a bit more of a topic of conversation because for a reason. Yeah. Because of the it because of the inheritance tax changes. So we've we've had financial advisors working with us. And these clients need to look at something. Myself and Robert looking at these, these opportunities in a way that we can, help those clients build a future for their for their, for their children.
00:44:59:08 - 00:45:32:15
Unknown
Okay. Wow. Okay. So and obviously, that ties in really well with what our model optimum is because we've got Ian who can do combined efforts to buy some rental properties and bits Ian can do to convince him for us. Yeah, we can do the tax planning. We can set up the company so we can do the whole structure in here, especially when the only way we can't do, we can't do all of them is if they want to get a mortgage on one of those properties, say they're buying because that's an the bring in for a mortgage broker however.
00:45:32:17 - 00:45:57:20
Unknown
Right. But if it was a cash purchase right. We can deal with all of it. Do like the whole maintenance of it or set up the structure, have the meeting properly gone into where the income streams are what you need, and go through these questions in depth. And we've been able to set up quite a lot of, situations that really help, parents pass that wealth down to the children in the tax efficient way.
00:45:57:22 - 00:46:14:22
Unknown
Fine. Which makes sense. And I mean, just to clear up, obviously, we spoke to Ian, I think it was a couple of episodes ago, about conveyancing and the like. I think it was what is conveyancing is one of those misunderstood, I know the name. I couldn't tell you what. And that was a good one on that.
00:46:14:24 - 00:46:33:03
Unknown
But even if you're saying a mortgage broker comes in, it's like, yes, you still do the majority. Oh, that's there is another party where they've lined up the person who's going to drop the extra money into the client account and able to purchase. So, and we work with many, many mortgage brokers. So we have a good relationship with them.
00:46:33:05 - 00:47:03:08
Unknown
And essentially the client can get looked after. So yeah, that's something that we're doing quite a lot with. Are we in a position then to say the my question, what are the main pros of buying through a company, and what are the potential drawbacks and complications? I think we've been doing that. Are you succinctly able to so like so naturally I think if someone's trying to build a portfolio and grow it and to have it forever, a limited company would be a better route.
00:47:03:09 - 00:47:28:26
Unknown
What do you mean by forever? As in, they're going to build up a portfolio and they're going to pass it down to the children. Right? Okay. So that I don't foresee selling these properties, though, that sort of scenario is one that would, push down the limit company route in my eyes. So that is presumably as in they are saying our mechanism for making money is from rentals coming in every month.
00:47:28:26 - 00:47:46:13
Unknown
And we're growing our portfolio. So we've got more rent. Yes. So they're not going to live. They're not going to take the money out for the rental income and put on their shopping bill, pay for their shopping, which is in this company. It's in a box. They're going to grow it, going to build it. I meant as opposed to people that were taking on property with the intention to making money from the sale.
00:47:46:13 - 00:48:02:10
Unknown
Yeah, a flip, a quick flip or something like a year flip, 18 month flip and then attached to like doing the rental, living off the rental income as well. So used to be I used to say the clients used to be able to get a short term win with buying rental properties where you made money on the rental, and then you made money on the capital value going up.
00:48:02:14 - 00:48:20:20
Unknown
Yeah, nowadays, with all these extra costs and stuff coming in, so ones like you got the higher, tax charges individual, but if you go to limit company, you got the lower tax charge, but you've got the county fees for doing limits company. Right. So again it's another thing. So you're not getting a lot of a short term win.
00:48:20:20 - 00:48:36:20
Unknown
So you're not going to go get a rental property and see your personal bank balance go up by very much in the short term. However, the hope then is that the value that that's going to go up is better than leaving in the bank. Yes of course. And so it's it's thought that it's taking all that into consideration.
00:48:36:22 - 00:49:09:27
Unknown
Okay. Potential drawbacks and complications of so limited company meet so with the idea of this family investment company, you can't just go, right. Brilliant. I'm going to give my son 10% of the these houses on shares because shares really easy transfer one piece paper and transfer it. Yeah. Drawback is you might be creating a tax charge capital gain even though you've received no money really because capital gains is done at market rate not on consideration value.
00:49:09:29 - 00:49:32:02
Unknown
So again that's another thing to be considering when we set up these family investment companies. It's good because you can give, your son or daughter 10% of your portfolio. As long as you're prepared, you get a tax bill. It's a bit harder to give, 10% of a property time than split the title. 10% not worth.
00:49:32:02 - 00:49:54:03
Unknown
So it's again, it's easier and there. But you got the pitfall is that hidden a capital gains tax charges that might happen. But that's the same as if you were to do it individually and try and split up, you still given away 10%. Yeah. You still got a capital gains tax bill. So it is, it there's just there's just so many things to consider.
00:49:54:03 - 00:50:22:26
Unknown
And it is. But we can we we do this all the time. We do these questions. We do these scenarios. Like I said, that email I wrote that it's three times nearly a slightly different lot in the space of a week or two. Yeah, which does speak volumes that that is the case. People people are considering it and it's so the way I that typically I find is that those, those traits that we work a lot with, they like to be able to control their own money, their own business, to control their own thing.
00:50:22:26 - 00:50:40:15
Unknown
So therefore, putting money into a pension fund to go to whoever to invest in stocks and shares doesn't sit with them as a characteristic, because the whole reason they set up their own company was to control their lives. Yeah. So therefore those are the people that you typically see buying a rental property because they can go I can touch that.
00:50:40:15 - 00:50:59:07
Unknown
I can see that I know it exists. Yeah. I drive by it on the way to like that customer. I'm doing a, an extension on I can see my rental property. You're just getting piece of paper for stocks and shares. So when you look at trying and matching up those personalities, that's what they a lot of them will do because they, they can touch and feel it.
00:50:59:08 - 00:51:14:20
Unknown
They can see that rental property. They understand it because if it needs some work they can re fix it. They can build it, they can add to it. They could do something with it because that's their area. And that's why this comes up a lot. Before I wrap this into a sort of a conclusion, is there anything. Yeah.
00:51:14:21 - 00:51:37:15
Unknown
Is there anything we haven't covered that you think we should have. Yeah probably. Probably. I mean, and I guess that's, you know, almost a point in itself is that there is a lot, I mean, I've got a phrase here. It's not a one size fits all answer. Absolutely not. No. Each scenario will run through. We might come out with the same answer, but it'll be for different reasons that that weighted it one way or another.
00:51:37:15 - 00:51:59:00
Unknown
I always say the need of which way did the needle go? It might still end up a limited company or might still end up in your own names. However, the reason why it will be different nearly on every client. Okay, and so if someone wants tailored advice. Yeah, from you guys to have a look at this, would they be able to do it at the exploratory stage.
00:51:59:03 - 00:52:14:13
Unknown
Yeah. So like quite often especially for existing clients we'll have that conversation. We will talk through. These are the things you need to be considering. Yeah. Because some of them go and I think I might want to do this. What do I need to know? And so you start, you go through the like a lot of these points.
00:52:14:13 - 00:52:27:19
Unknown
These are the bits you need to know. And then if they go right, actually I want some help to really work out which one is right for me. Then we go down, we get a meeting, we gather up that information and tell them what they need, and then we'll do a little like a little rapport or an email.
00:52:27:19 - 00:52:48:00
Unknown
That kind of gives the depth of going, this is this is the way it looks based on your circumstances that you want to go. Yeah, yeah. Okay. So how old I mean, and presumably it can be you mentioned the existing clients, but of course, you know, the people that aren't yet can become clients by coming to you guys and get this tailored advice.
00:52:48:00 - 00:53:12:06
Unknown
Yeah. That's it. So again, we'll have a first conversation or so for like start with, understand what it is thereafter. And then we can provide quotes of what we would expect based on that sort of call that information. This is what it will cost to go down this route. These are the services we can provide within it. Yeah, these are the actual ones that we don't on included, but we can provide if it's something they want because some people have their own solicitors if they're going down the route and wanting to buy make.
00:53:12:13 - 00:53:32:12
Unknown
So that's fine. They've already got a strong relationship with them. We work with other solicitors as well because naturally they got that. But to letting them know that we got in on the, on the convention side as well. And we can just do it all here and keep it all together. We've got the website there, opt as in optimal optimum professional services dot.
00:53:32:12 - 00:53:55:06
Unknown
Co.Uk. So opt.co.uk but watch is there anyone in particular they should reach out to. You know just just come into a like either info opt or myself or rope and just just contact us and we'll have a, we'll have that chat through and we can see what we can come up with. Fabulous. Something to help them.
00:53:55:06 - 00:54:13:15
Unknown
That's the trick. Reach out, ask the questions. Even if to start with you've got more questions that that then means I. Oh yeah. Definitely that that starting bit you're going to I'm going to ask you more questions than you asked me, which is fine because I don't know. What I don't know is the key point. So for you to go right, I need you to go and find these bits out.
00:54:13:17 - 00:54:31:22
Unknown
Then I go, okay, cool. No problem. I'll go and find those out, then bring that back, and then you assimilate that. Yeah. To to then work out the right way to go. Absolutely brilliant. I've got a date. Now, if I stuff watch it back a couple of times. Oh. Oh yeah. Yeah. But I've got other I have a look through this and create the clips and everything from this.
00:54:31:22 - 00:54:54:18
Unknown
So he's going to have that ache as well. But my absolutely brilliant. Thank you very much. Thank you for hosting us again. No. Absolutely brilliant. So I hope that was useful for everybody. And if you've not got a headache, but it also is retail. If it's something you're even thinking to do, you're doing or you're going to change the way you do, it reached out to optimum, and you can see that there's a whole lot of consideration, certainly a lot more than I realized.
00:54:54:20 - 00:55:16:24
Unknown
To be fair, will then see you for episode 19, which I think is going to be coming quick, far after. Yeah, just about the verification for you for, directors and essentially shareholders at companies House. Yeah. Because people are suddenly getting contacted saying we need you to. Yeah. Need to do detail. So it's the next bit to make sure that everyone is who they say they are.
00:55:16:28 - 00:55:29:11
Unknown
Companies house. Okay. So we will look to cover that. Yep. Possibly within the next week or two. So that we can get that information out to you as well. So I look forward to seeing you then. Cheers. Cheers.