Should I buy property as a limited company?

BUYING PROPERTY AS A LIMITED COMPANY – ADVANTAGES AND DISADVANTAGES

With changes to mortgage tax relief over the past few years, the number of limited companies set up for Buy To Let properties has risen by over 130% since 2016.

The main reason for this is tax efficiency. Higher rate taxpayers, renting out a property as a private individual you could pay up to 45% of your rental income in tax; as a limited company, you will pay corporation tax at 19%. But there are other factors to consider, depending on your personal circumstances and short/long term plans.

We have put together some of the advantages and disadvantages of buying a property through a limited company.

Advantages

1. Tax benefits

As mentioned above, setting up a limited company to buy a rental property can make sense if you are a higher rate taxpayer. As a limited company, you will be liable for corporation tax on the company’s profits at a much lower rate of 19% (this is due to increase to 25% in 2023 for larger companies with profits over £50,000).

In the past, income tax on rental income could be offset by mortgage tax relief. Since 2017 this relief has been gradually reduced, and from 2020 landlords can no longer offset interest on their mortgage repayments.

2. Inheritance tax benefits

Buying a house as a limited company could be a way of minimising the inheritance tax paid by your family members. You may be able to do this by making them shareholders in your limited company but obtain professional first.

3. Limited liability

A limited company is separate from your personal affairs, meaning that you are not personally liable for any losses.

Disadvantages

While the tax advantages of setting up a limited company make it sound like a better option, there are some things you should also consider:

1. Costs of setting up a limited company

You can apply online to register your company for just £12. Your company will usually be registered within 24 hours. 

2. Capital gains tax

Unless you set up your company before purchasing your buy-to-let property, you will need to “sell” your let property to your limited company. This could trigger capital gains tax if the value of the property has risen since you first bought it.

The capital gains tax rate for residential property is currently 28% for higher rate taxpayers, or 18% for basic rate taxpayers (depending on income and size of gain).

There is no capital gains tax to pay if your limited company sells on a property in the future; the company would pay corporation tax on the profit instead.

3. Stamp duty Land Tax

Stamp duty is payable on a purchase (and repurchase) of a property. In addition, anyone buying a second home is subject to a 3% surcharge on the rate of stamp duty owed.

4. Costs of running a limited company

Once your company is registered, you will have additional responsibilities – you will need to prepare annual accounts and submit company tax and corporation tax calculations to HMRC. It is advisable to engage an accountant to complete these tasks.

5. Higher mortgage costs

Mortgage lenders can charge slightly higher rates of interest for Limited Company Buy To Let mortgages.

Changing the ownership of the property from an individual to a company could also mean changing your mortgage if you have one. This could trigger early repayment fees as well as additional legal and valuation fees.

If you are building a rental property portfolio in the name of a limited company, it is advisable to gain the advice of a specialist mortgage broker, who will ascertain the best lender for your individual needs.

Before you make your decision

As you can see, buying a property through a limited company has both advantages and disadvantages, and can make a huge difference to the amount you pay in tax. We would strongly advise you to consult your accountant or a specialist property tax adviser about your personal circumstances and future plans, before making your decision.

Please contact me if you would like any further information on Investment Opportunities or our Asset Management services.

Dawn Clarke 07967 209011

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