Buying Property Through a Limited Company; Pros and Cons

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Should you buy property through a limited company?

There are advantages and disadvantages to buying property through a limited company, and like many things in life, nothing is ever black and white! We discuss the pros and cons in this article.


What are the benefits of buying property through a limited company?

Tax savings 

You can save thousands of pounds, which is probably the biggest reason investors form limited companies. The profits from rental income for individual landlords are taxed via income tax, along with other earnings such as salary, shares, or dividends. The tax percentage depends on earnings and ranges from 20-45%.

If you buy property through a limited company, you are subject to corporation tax instead, which is far lower than income tax at 19%. This will increase to 25% in 2023. If you fall into the higher tax band, you can save huge amounts of money by paying corporation tax instead of income tax.

Mortgage tax relief 

The tax changes in April 2020 mean that landlords can no longer deduct mortgage expenses from their rental income (to reduce their tax bill). Every landlord would agree that buy-to-let mortgages aren’t cheap and paying tax and monthly interest payments can easily eat into rental profits.

If you’ve bought a property through a limited company, you can treat mortgage interest as a business expense. So, you receive 100% tax relief against the income.

Inheritance tax benefits  

If your end goal is to pass your property investments on to family members, buying the properties through a limited company could be a good option, as you would have more opportunities to reduce inheritance tax.

Reinvest savings  

If you bought your property through a limited company, your profits after corporation tax can be kept in the company and used to reinvest in other buy to let investments. This helps you avoid further tax payments.


What are the disadvantages of buying property through a limited company?

Mortgage availability   

There are fewer available mortgages than if you are an individual investor, and they are still subject to the same checks. In the past, companies found it a lot harder to find the right mortgage, and they used to come with lower borrowing limits and even higher monthly costs. But lenders have now started to supply more mortgages to mitigate this downside, as more and more investors are buying through limited companies.

Tax when you take money out 

Taking money out of the company isn’t always easy. You need to either receive the money as a salary or take it out as a dividend. You can’t simply draw the cash out and pocket it. So, although there are savings to be had in some areas, you will be spending money in others. We've detailed some of the costs below.

Dividends

  • The first £2,000 you take is tax free  
  • Above £2,000, you start to pay a rate of between 8.75% - 39.35% 
  • This tax is paid after corporation tax. If your income doesn’t fall under the higher income tax rate, you limit the savings potential 
  • The dividend exemption of £2,000 is to reduce from April 2023 to £1,000, and £500 from April 2024 

Salary

  • Operate PAYE and provide national insurance contributions 
  • Sometimes these contributions can be even pricier than the higher tax rates with the dividends option

Transferring properties in your own name is expensive

If you already own a few buy to let investments, you can’t just simply transfer them into a company. Your company will need to buy them off you! This means you’ll need to pay the usual costs that come with buying and selling property: stamp duty tax, capital gains tax, any early mortgage repayment charges, and legal fees.

If you only own one or two properties, transferring them into a company name might not be worth it. But if you have 10 rental properties, it might be a more tax efficient solution. Before deciding, you should always get advice from an expert.

Extra hassle

It can be time-consuming, so if you don’t have the time, it might not be for you. There are additional costs as well, like paperwork and filing annual company accounts, and accountancy costs on top of that all start to add up. It’s not a huge problem but should be considered during the decision-making process.


Questions you should ask yourself before making the decision.

How much income will you make?

If your income falls into the higher tax bands, the lower corporation tax rates might make it worthwhile.

Do you already own property?

If you own several properties, you might save money in the long term. If you only have one or two, it might not be worth it.

Do you need a mortgage?

If you rely on mortgages, you could consider it, as you can claim 100% of your mortgage interests against the income as an expense. This will save you cash. 

This guide is for general information only. No responsibility is taken for any action or refrained form in consequences of its contents. Always seek professional advice before acting.