Buying a property through a limited company?

August 16th 2019

There is currently a huge shift towards buying property within companies and according to recent figures, up to 80% of new buy to let mortgage applications are now for limited companies.

Until 2015, there was no compelling need for most people to make this choice and mortgages for companies were much less competitive. But then changes to the treatment of mortgage interest were introduced in the 2015 budget and this made the limited company route far more appealing.

Whilst it is not wise to purchase your main home through your company as you are likely to incur a benefit in kind, it may, depending on your individual circumstances, be tax efficient to buy an additional property through your company.

If you are a business owner operating as a limited company, you may have considered buying property through your business. But before making this decision you must look at the advantages and disadvantages, property tax expert Kenny Logan provides the answers.

Advantages of buying through a limited company
There are a sound financial reasons why you might choose to own property as a company rather than as an individual.

Firstly, the way you are taxed on the rental income will differ slightly. If you own a property as an individual, the money you get from rent will be taxed as income tax, alongside your other earnings.

But, if you choose to invest a property in your limited company, the profit you make will be liable to Corporation Tax instead, which is currently 19% for profits totalling £300,000 or less. This could make a huge difference to the amount of tax you pay, if you pay income tax at 41% or higher.

Rental profits taken as salary or dividends will be taxable income taken from your band. However, there are ways you can take your dividends to maximise tax efficiency, or you can leave them within the company to use on your next investment property.

Leaving it in the company for future purchases, or just until your non-property income falls, will leave you better off than if you need to take it out to spend.

Reasons not to buy through a limited company
The main challenge that you might encounter if you intend to use your limited company to buy property, is finding a suitable lender. The majority of buy-to-let lenders may not lend to limited companies and if they do, they often require a personal guarantee from the directors.

By doing this, the lender will have recourse to the director personally in the event the company defaults. In this case, additional legal costs and taxes would be due to transfer the property back to you.

Although it is possible to approach a commercial lender, you are likely to come across higher interest rates and lower loan to value ratios. One of the things that make property an attractive investment is financial leverage and if you only have access to high rates and poor loan to value, this benefit is removed.

The number of products on offer for limited companies is still much lower than for individuals, but it is changing, as more investors are moving in this direction, lenders are following in order to win their business.

The other downside is that as a Company Director there are more statutory obligations that need to be fulfilled but this is an area JRW can help.

Things you should consider before making a decision
Ultimately, there is no simple answer and the choice you make will depend on a number of factors.

1. Tax treatment of profits

If you own a property in your own name, the profits that you make from renting it out will be added to your other earnings and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

If you buy a property as a higher or additional rate tax payer, you will have to pay income tax at 41 to 46%. However, by putting it through your limited company, you will only be subject to pay Corporation Tax at 19%.

You will still be taxed on the dividends if you take profits out of the limited company, but there is flexibility and you can time your dividends for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers.

But there are other options if you do not want to buy via your limited company. A lower earning spouse could put the property in to their name, only incurring income tax at their basic rate band.

2. Tax treatment of mortgage interest

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors, they’ll claim a basic rate allowance instead. But it will continue to be allowable for companies that hold property. This means that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

2. How much money do you have?

As some lenders may not lend to limited companies, you might not be able to access the best rates and deals. But, buying through your company might be a good option if you have a large sum of money in savings, which you could inject into the company to pay any deposit on the property.

If you’re paying the higher rate of income tax and you don’t have a lower earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that as you acquire properties, your portfolio could be increasing in capital value, so with planning, taxable gains could be delayed until you retire and your income falls.

3. Opportunities to mitigate Inheritance Tax

Property held within a company gives more options when it comes to planning for Inheritance Tax. If you are planning to give the property to your children after you die, purchasing through your limited company may be beneficial. There are ways to make Inheritance Tax savings by buying this way such as trust structures and different types of shares.

Children can become shareholders of your limited company. This would mean that when the property is sold, the proceeds would be distributed between the shareholders. This would still be taxable but not at the same level as Inheritance Tax.

If passing your properties on is important to you, holding them within a company that is properly structured, could result in huge Inheritance Tax savings.

4. Switching property to a company

The transfer of existing properties into a company would be treated as a sale by you to the company and you would be liable to Capital Gains Tax. You could also face a Land and Buildings transaction tax liability which could make the switch very expensive. Keep in mind that transferring residential property into a connected company will incur the Additional Dwelling Supplement charge of 4% on the entire market value. It is usually advisable to retain existing properties within personal ownership and buy any future properties via a company. However, there are reliefs and allowances available such as Principal Private Residence and Lettings Relief, which may mitigate exposure to capital gains tax on disposal to a Limited company, although they will have no impact on LBTT.

In Summary
If buying a property through your limited company is something that you have been considering it is important to look at your long term goals as an individual and as a company.

Before you make your final decision; you need to determine how much income you have, review the tax opportunities of buying property through a Limited company, whether you need to live off the property income and decide on your long term investment plans. Of course, if a higher-rate taxpayer, the ability to claim the entirety of your mortgage interest as operating expenses will be a major argument for using a company.

As ever, JRW can help you to analyse your individual situation and will offer advice and guidance that’s right for you, as well as ensure that you mitigate the tax exposure.

Related Services