Buying Property as a Limited Company – Advantages and Disadvantages

It used to be the case that only a tiny minority of property investors would buy a house through a limited company. With changes to mortgage tax relief over the past few years, that number has grown substantially.

The main reason for buying a residential property through a limited company is tax efficiency. If you are a higher-rate taxpayer renting out a property as a private individual, you will pay up to 45% of your rental income in tax.

Do so as a limited company and you will pay corporation tax at 19%. Put in these simple terms, it sounds like a no-brainer, but before your contact your accountant and start registering with Companies House, there are a few things to think about.

Buying Property as a Limited Company

We look at some of the advantages and disadvantages of buying a property through a limited company.

Advantages of buying through a limited company

What are the tax benefits?

The main advantage of buying a property through a limited company is the tax benefits mentioned above.

To explain in more detail; setting up a limited company can make sense if you are a higher rate taxpayer. Rather than paying income tax on your profits, at up to 45%, landlords who own rental property through a limited company will pay corporation tax on their profits at the much lower rate of 19% in 2020.

In the past, the income tax you paid could be offset by generous mortgage tax relief. Private landlords were able to claim tax relief on their mortgage interest at the rate they paid income tax; at as much as 45% for those paying the highest rate of tax.

Since 2017 this relief has been gradually reduced, meaning that this financial year landlords will only be able to claim relief at the basic tax rate of 20%.

As an example, before 2017 if a landlord paid the highest rate of tax and had an interest-only buy-to-let mortgage of £1,850 a month, they could have claimed £830 back from HMRC in tax relief. Under new rules, in 2020, this would be just £370.

Here you can see from the table below, that you can still deduct some of your finance costs but these deductions have been reduced over time and replaced with a basic rate relief tax reduction.

Tax Year Mortgage interest deductible 100% Deductible at a 20% tax credit
2016-2017 100%
2017-2018 75% 25%
2018-2019 50% 50%
2019-2020 25% 75%
2020-2021 100%

What about limited liability?

Another advantage is that if you run your buy-to-let business as a limited company, it will be legally separate from your personal affairs, meaning that you aren’t personally liable for any losses.

Are there inheritance tax benefits too?

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 take advice on this.

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Disadvantages of buying through a limited company

While the tax advantages of setting up a limited company make it sound like a good idea, there are some things you should bear in mind first.

There are costs associated with running a limited company, and it may take up more of your time than managing a property as a private individual.

You will be required to prepare detailed accounts which may involve paying professional fees to accountants and lawyers. You may also struggle to get as favourable a buy-to-let mortgage rate as those available to personal borrowers.

It is definitely advisable to get professional advice before you get started.

There are five additional costs to consider:

1. Capital gains tax

Unless you set up your company before purchasing your buy-to-let property, you will need to sell your second home for repurchase by your limited company. Doing this can trigger capital gains tax if the value of the property has risen since its original purchase.

The capital gains tax rate for residential property is currently 28% for higher-rate taxpayers. For basic rate taxpayers, the rate depends on the size of your gain and your taxable income.

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.

2. Buying property through a limited company and stamp duty land tax

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

For example, someone buying a £3m apartment in Eaton Place as their primary residence would pay £273,750 in stamp duty. Someone transferring this property to a limited company would face the higher stamp duty bill of £363,750.

3. Higher mortgage fees

Changing the ownership of the property from 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.

Many lenders also charge higher interest rates and fees for limited companies compared to individual buy-to-let landlords.

4. 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. Postal applications take between eight and 10 days and cost £40. Should you need it, a same-day service costs £100 – you must apply to Companies House by 3 pm.

5. Costs of running a limited company

Once your company is registered, you will have additional responsibilities – you will need to prepare accounts and submit company tax and corporation tax calculations to HMRC. You may need the services of an accountant to complete these tasks. If you already use an accountant, they may charge higher fees when preparing accounts for limited companies. You may also have additional legal and auditing fees to consider.

Things to think about

Are you a trader or an investor?

If you are buying property to renovate, rent out and then sell on at a profit you are probably a trader rather than an investor. In this case, you should consider setting up a property company. Otherwise, you will need to pay capital gains tax on the profits from each property you sell. If this isn’t in your plan, you are an investor and will need to weigh up all the pros and cons of buying through a limited company or operating as a private individual.

What does setting up a limited company involve?

To set up a limited company you will need to register with Companies House. Your company must have at least one director and at least one shareholder, but these can be the same person.

You will need a name for your company and to decide whether you are the only shareholder, or whether you wish to extend share ownership to someone else, such as your partner.

You will also need a company address. You can use your own address or, if you have an accountant, you can use their office.

You must register your company as an employer with HMRC, even if you are only paying yourself as a director.

Why more landlords are setting up companies

In recent years, there has been a growing trend of landlords setting up companies to manage their rental properties. This shift can be attributed to several factors that have prompted landlords to restructure their business operations. Let’s explore some of the reasons why more landlords are opting to establish companies.

  1. Legal and Financial Advantages: One of the primary reasons landlords are setting up companies is to take advantage of the legal and financial benefits that come with this structure. By incorporating their rental business, landlords can separate their personal assets from the properties they own, providing them with limited liability protection. This means that if any legal issues or debts arise, the landlord’s personal assets are shielded from potential claims or losses. Furthermore, incorporating can offer tax advantages, allowing landlords to potentially reduce their tax liabilities by deducting certain business expenses.
  2. Professional Image and Credibility: Operating as a company can lend a more professional image to landlords, especially those with larger property portfolios. By establishing a company, landlords can project a more credible and established presence in the rental market. This can attract potential tenants and help build trust with stakeholders such as banks, lenders, and investors.
  3. Expansion and Scalability: Many landlords who manage multiple properties find that operating as a company offers greater scalability and opportunities for expansion. As a company, landlords can streamline their operations, implement standardized processes, and leverage the benefits of having a centralized management structure. This can facilitate growth and make it easier to acquire additional properties, secure financing, and manage a larger rental portfolio.
  4. Risk Mitigation: Running a rental business inherently carries some level of risk. Setting up a company can help landlords mitigate these risks by providing a layer of legal protection. By separating personal and business assets, landlords can safeguard their personal wealth and minimize the potential impact of any legal disputes or financial setbacks.
  5. Succession Planning and Asset Management: Establishing a company can be a strategic move for landlords looking to plan for the long term and ensure the smooth transfer of assets. By incorporating, landlords can structure their business in a way that allows for easier succession planning, ensuring that their rental properties can be seamlessly passed on to family members or other beneficiaries in the event of retirement, incapacity, or death.

It is important to note that while setting up a company may offer certain advantages, it also comes with additional responsibilities, such as complying with legal and financial regulations, maintaining proper accounting records, and fulfilling corporate obligations. Therefore, landlords considering this option should seek professional advice from lawyers, accountants, and other relevant experts to ensure compliance and make informed decisions.

Frequently asked questions about buying-to-let through a limited company

Will my company be able to borrow money?

Yes, but as we mentioned earlier you may find it more difficult to get a loan than if you are borrowing as a private individual. This is because of your limited liability status – it makes you a more risky prospect. It also means that your interest rate is likely to be higher and your loan-to-value ratio will be lower, so you may need a bigger deposit.

If I already own property in my own name, is it worth transferring it to a company?

This will depend on several factors – whether you will have capital gains tax to pay on the property and how much stamp duty you will need to pay, for example. You will need to calculate all of the costs we outline above and decide whether these will be offset by the tax savings you will make.

I’m buying my first buy-to-let property, should I do this through a limited company?

Buying-to-let won’t give you access to the stamp duty benefits enjoyed by first-time buyers purchasing property for their own use. So, as with anyone else, you will need to weigh up the pros and cons of buying a property through a limited company and take professional advice. If you do want to go ahead you should set up your company first, then buy the property to avoid the capital gains tax, stamp duty and mortgage fees owed when you transfer.

If you are a first-time buyer, you may find getting a buy-to-let mortgage more difficult if you are buying through a limited company.