Should I Buy Property Through a Limited Company?

Gary Green
Gary Green
December 30, 2019

When you come to buy property, you have to decide the best way to do it.

There are a number of different financial considerations around your decision to buy property. The two most common options are either to:

  • buy the property yourself, in your own name
  • buy the property via a limited company (that you might have created just for this purpose)

We would start by saying it's not usually a good idea to buy your MAIN home through a company. You would incur a "benefit in kind" which would typically negate any tax advantages.

Second, make sure you refer to the relevant pages on the HMRC website before making any decisions on your own:

When it comes to additional properties, it might be worth going via a limited company. First of all, you need to decide if you are a "trader" or an "investor".

Trader Or Investor?

If you buy a house or flat with the intention of selling it for a quick profit, you're a trader.

This includes situations where you plan to make some short-term improvements in order to raise the price. When you then come to "flip" the house, you're engaging in a trade. Hence, you're a trader.

If you buy a house or flat intending to rent it out, you're an investor. Although you also hope to benefit from the price appreciating, you're in for the long term.

Best Option If You're A "Trader"

If you'd consider yourself a trader, we usually recommend going through a company. This is due to the different way that profits from "flipping" properties are charged:

  • Corporation tax (if you're a company)
  • Income tax (if you're a private individual)

As of the end of 2019, corporation tax is 19%. Income tax is anything from 20% to 45%. (We're assuming that you've used up your personal allowance). So it clearly makes sense to go down the corporation tax route if you're a trader.

For the rest of this article, we'll assume you are operating an an "investor".

Advantages Of Buying As An Individual Investor

We'll start by explaining why you might NOT want to buy property through a limited company.

Easier To Get A Good Mortgage

In the past, it was much harder to get a mortgage as a company as compared to an individual investor.

Mortgage rates were much higher, which meant that you couldn't leverage as much of your initial investment. A lot of lenders wouldn't even allow buy-to-let mortgages for limited companies.

It has become easier in recent years. However, it still requires a bit more work. And you might find the terms aren't as generous.

We always recommend you look for a specialist lender who understands the implications of owning property via a limited company. To do so, find a specialist mortgage broker to represent you.

Minimal Compliance & Admin

Running a limited company (even one that's just been set up to buy investment property) is much harder than just operating as an individual.

You'll have to incorporate the company, keep records and file a tax return. This will, of course, eat into your time.

And there's an additional cost if you decide to employ a professional accountant to help with the paperwork.

In contrast, operating as an individual property investor is much simpler. You just need to record your rental profits on your individual tax return.

Dividend Taxation

Corporation tax (as we've explained) is lower than income tax (usually). But this only really factors in if you plan to leave the profits in the business.

If you want to take rental profits out, you'll end up paying tax again. They will be treated as dividends (assuming you've used up all your tax-free allowances).

So you'll end up paying tax twice. First the company will pay its corporation tax. Then you'll pay tax on the amount you take out.

Advantages Of Buying As A Limited Company

We've already explained one advantage of using a limited company. Corporation tax is around half the rate of income tax. This can be a huge saving when dealing with rental income.

Here are a couple of other advantages:

Mortgage Interest

The mortgage rules for PRIVATE buy-to-let landlords are changing.

Up until 2019, you could claim mortgage costs against your rental profit. From 2020, you won't be able to. (You'll be able to get some relief via a basic rate deduction).

Another advantage of buying through a company is that investors can borrow at higher loan to value than in a personal or partnership ownership.

The rent to interest calculations with some limited company mortgage lenders are 125% at pay rate – eg 125% at 3.39%, rather than 145% at 5.50% if the property were in a personal name.

We'll go into all the details and implications in a future post. For the moment though, it's enough to say that this is a big reason to consider managing your properties via a limited company.

Inheritance Tax Implications

If you're concerned about reducing your inheritance tax, buying property through a company offers you lots of flexibility.

You should always contact a tax professional before making any big decisions like this. But your accountant will be able to run you though all the different trusts, share splits etc that can help manage your inheritance tax via a company.

In future articles, we'll have more details and advice about this aspect of property management. In the meantime, please get in touch for a free, no obligation chat about any of these issues.

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