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Using a Company to Grow Your Property Portfolio – a Detailed Case Study by James Bailey

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Using a Company to Grow Your Property Portfolio – a Detailed Case Study by James Bailey

Tax Article

A company comes into its own when the plan is to reinvest the rental profits in more property, rather than to draw them out for living expenses. Jane has a well paid job, and pays income tax at 40%.

 

She wants to build up a portfolio of rented properties, using the profits from the rentals to fund the acquisition of other properties. She begins with a portfolio of 10 buy to let properties, like Bill’s, but instead of taking the profits out of the company, she leaves them there to fund the deposits on new properties.

 

Note that this example assumes that, as announced in the 2008 Budget, the rate of corporation tax for a small company will be 21% for Financial Year 2008, 22% for Financial Year 2009, the same for later years.

 

In the first year, the position will be:

 

Company Direct ownership

Profits 20,000 20,000

Cost of company (1,000) NIL

Profit after costs 19,000 20,000

Tax payable (3,990) (8,000)

Cash for reinvestment 15,010 12,000

 

If the pattern is repeated in the following year, the cash available for reinvestment in the company will be £29,830, compared to £24,000 if the properties are owned directly.

 

Let us assume that £20,000 is used to fund the deposit on a new property, and that as a result, the profit for the third year increases to £22,000:

 

Year 3 Company Direct ownership

Profits 22,000 22,000

Cost of company (1,000) NIL

Profit after costs 21,000 22,000

Tax payable (4,620) (8,800)

Cash after tax 16,380 13,200

Add cash from previous years 29,830 24,000

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 26,210 17,200

 

The company can afford to use another £20,000 to fund another deposit on another property, taking its profits to 24,000. If Jane owned the properties directly, she could not yet afford another deposit, so year 4 looks like this:

 

Year 4 Company Direct ownership

Profits 24,000 22,000

Cost of company (1,000) NIL

Profit after costs 23,000 22,000

Tax payable (5,060) (8,800)

Cash after tax 17,940 13,200

Add cash from previous years 26,210 17,200

Deduct deposit on new property (20,000) N/A

Cash for reinvestment 24,150 30,400

 

The company can afford to spend another £20,000 on the deposit for yet another property, and this year, so could Jane as an individual:

 

Year 5 Company Direct ownership

Profits 26,000 24,000

Cost of company (1,000) NIL

Profit after costs 25,000 24,000

Tax payable (5,500) (9,600)

Cash after tax 19,500 14,400

Add cash from previous years 24,150 30,400

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 23,650 24,800

 

For year 6, both businesses can afford another deposit, so here is Year 6:

 

Year 6 Company Direct ownership

Profits 28,000 26,000

Cost of company (1,000) NIL

Profit after costs 27,000 26,000

Tax payable (5,940) (10,400)

Cash after tax 21,060 15,600

Add cash from previous years 23,650 24,800

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 24,710 20,400

 

For year 7, both businesses can again afford another deposit, so here is Year 7:

 

Year 7 Company Direct ownership

Profits 30,000 28,000

Cost of company (1,000) NIL

Profit after costs 29,000 28,000

Tax payable (6,380) (11,200)

Cash after tax 22,620 16,800

Add cash from previous years 24,710 20,400

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 27,360 17,200

 

For Year 8, only the company can afford a £20,000 deposit, so in Year 8:

 

Year 8 Company Direct ownership

Profits 32,000 28,000

Cost of company (1,000) NIL

Profit after costs 31,000 28,000

Tax payable (6,820) (11,200)

Cash after tax 24,180 16,800

Add cash from previous years 27,360 17,200

Deduct deposit on new property (20,000) NIL

Cash for reinvestment 31,540 34,000

 

In Year 9, both buy another property:

 

Year 9 Company Direct ownership

Profits 34,000 30,000

Cost of company (1,000) NIL

Profit after costs 33,000 30,000

Tax payable (7,260) (12,000)

Cash after tax 25,740 18,000

Add cash from previous years 31,540 34,000

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 37,280 32,000

 

In year 10, both can buy one more property:

Year 10 Company Direct ownership

Profits 36,000 32,000

Cost of company (1,000) NIL

Profit after costs 35,000 32,000

Tax payable (7,700) (12,800)

Cash after tax 27,300 19,200

Add cash from previous years 37,280 32,000

Deduct deposit on new property (20,000) (20,000)

Cash for reinvestment 44,580 31,200

 

If we summarise the results for the first ten years, we get:

 

Company Direct owned Difference

Total income 272,000 252,000 20,000

Total running costs (10,000) NIL (10,000)

Total tax paid (57,070) (100,800) 43,730

Total cash benefit 53,730

 

Number of properties in portfolio 18 16 2

So, by using a company, Jane would be £53,730 better off after ten years, and this is reflected in the fact that her property portfolio has grown by two more properties than it would have done had she owned the properties directly.

By James Bailey