5 tax mistakes landlords make after moving property into a company
You moved your property into a limited company, probably because of Section 24 and the way mortgage interest is treated when you hold property in your own name. For a lot of landlords that was the right call.
But a company is not just a different name on the deeds. It has its own tax rules, its own deadlines and its own ways of costing you money quietly. These are the five that come up most often, what each one costs, and what to do instead.
Drawing money out without deciding how
What happens
You need money, so it moves from the company account to your personal one. Sometimes it is a dividend. Sometimes it is called a salary. Often nobody decides which until the accounts are prepared, months after the year has ended.
What it costs
By the time it is decided, every option that would have saved you money has expired. A salary has to be reported through payroll at the time it is paid, not backdated afterwards. A dividend can only be paid out of profit that actually existed on the day you took the money. A pension contribution from the company has to be paid before the year end to count against that year. The bill is fixed before anyone sits down to look at it.
What to do instead
Decide at the start of the year roughly what you need to take out and in what form, then review it once in the middle. It takes about an hour, and it is the cheapest piece of tax planning available to a property company.
Letting the director's loan account drift
What happens
Money leaves the company that is not a salary and not a dividend. A personal card payment goes out of the company account. Cash is taken when a rent payment lands. All of it collects in the director's loan account, which most landlords have never had explained to them.
What it costs
If you owe the company money at the year end and you have not repaid it within nine months and a day of that year end, HMRC charges the company additional corporation tax on the outstanding balance. You get that money back once the loan is repaid, but you can wait a long time for it, and the cash has gone in the meantime. If the loan goes over a certain size and you are not paying interest on it, there is also a benefit in kind to report.
What to do instead
Know the balance. It should be a number you could say out loud at any point in the year, not something you discover in a letter. Keep personal spending off the company card entirely, which has the useful side effect of making your accounts much faster to prepare when a broker is waiting for them.
Funding the next purchase with money you have already paid tax on
What happens
There is profit sitting in the company and you want to buy another property. So you take the profit out personally, pay income tax on it, and put what is left into a new company as the deposit.
less cash needed to fund the same purchase, with the right structure
What it costs
You have paid personal tax on money that never needed to leave the group in the first place, and the purchase has taken that much longer to save for.
What to do instead
Where it suits the situation, companies can sit underneath a holding company. Profit moves up to the holding company and back down to fund the next purchase inside the group, without the personal tax step first.
This is not right for everybody and it is not free to set up, so the real question is whether the tax saved across your next two or three purchases is worth more than the cost of doing it. That is an arithmetic question with an actual answer, and it is much better to have the answer before you buy than after.
Guessing at what you can claim
What happens
A bill arrives for work on a property and it goes into the accounts as a repair, because that is what it felt like. Or the reverse: a large spend is assumed to be capital, so nothing is claimed at all.
What it costs
A repair reduces your rental profit this year. An improvement does not. It goes against the capital gain when you eventually sell, which might be twenty years away, or never. Get the line wrong one way and you overpay tax now. Get it wrong the other way and you have claimed something you were not entitled to, which is a considerably worse conversation to have later.
The line is not always obvious. Replacing a kitchen with a broadly similar kitchen is generally a repair. Replacing it with a significantly better one is not, at least not all of it.
There is also a set of things a company can claim that a landlord holding property personally cannot, and finance costs are the big one. A company deducts them from its rental profit in full. That is usually the entire reason the company exists, so it is worth checking it is actually being claimed properly rather than assumed.
What to do instead
Keep invoices with enough detail to show what was actually done, not only what it cost. "Bathroom, £4,200" is not enough to make the call a year later.
Leaving everything until after the year end
What happens
The accounts are prepared some months after the year has finished. That is the point at which tax gets discussed.
What it costs
By then almost every lever has gone. Pension contributions, the mix of salary and dividends, the timing of a large repair, whether a purchase completes in this year or the next, whether the shareholdings are arranged sensibly. All of those have to be decided before the year end to count for that year. Afterwards, the only thing left to do is report what already happened.
What to do instead
One conversation two or three months before your year end, every year. That is the difference between an accountant who tells you the number and an accountant who changes it.
Which of these five apply to you?
Every portfolio is different. What each of these is worth depends on your rate of tax, how your companies are set up today and what you are planning to buy next. Book a call and we'll go through them against your actual position.
This guide is general information about UK tax for landlords whose property is held in a limited company. It is not advice, and it should not be relied on as advice about your own position. Tax rules and rates change, and how any of this applies depends on your circumstances.
The 38% figure is an illustration of what the right structure can be worth. It is not a promise, and the saving in your case may be more, less or nothing at all.