Buying property through a limited company

As a Landlord are you unsure which ownership structure is better for you in terms of running and managing a buy-to-let property business?

Should you be buying property through a limited company or buying your properties personally?

Getting your ownership structure right is something that could make a huge difference in terms of the amount of tax you pay over your lifetime.

Unfortunately, the answer is complicated. There is no single correct answer for everyone and there are pros and cons to each option, depending on your circumstances. It is advised to speak to a specialist property accountant who can help to review your individual situation.

With Landlords starting to be hit with mortgage interest relief changes, some may well be considering moving to a limited company structure and many have already taken the leap. In fact, up to 80% of new mortgage applications are now created for limited companies.

Setting up a limited company is not the right choice for every landlord, so let’s look at the pros and cons to help you decide.

The pros of buying property through a limited company

Tax treatment of profits

There are many things to consider and the first is if you are paying the higher rate of income tax and don’t have a lower-earning spouse whose name the property income would be put into. If so then Corporation Tax (19%) is going to be much lower than the income tax alternative (around half the high rate band –40%) and the argument for buying through a limited company is much stronger.

Mortgage interest is an allowable expense

From April 2020 you will no longer be able to deduct mortgage interest costs from your taxable profits if your property is owned by you as an individual. Instead you will receive mortgage interest tax relief of 20% which will in turn reduce the tax liability, but not taxable income. This may result in you falling into the higher bracket of taxable income. However, if you own your property as a company you will continue under the old rules and therefore be taxed less.

Inheritance tax mitigation

If property is held within a company, there will be more options available when planning against Inheritance Tax. If you are intending to pass your portfolio down to family members, making use of trust structures and shares, which are only available to companies, can offer large savings on inheritance tax (IHT).

The cons

Mortgage availability and cost

Mortgage availability, cost and lower borrowing limits may be an issue when buying a property through a limited liability company. However, while this used to be more of an issue, it’s no longer strictly the case with increasingly more products now available on the market. You will still need to give a personal guarantee, however, so you need to consider that your personal finances will be scrutinised.

Profit extraction

If you are planning to leave rental profits in the company and potentially use them to buy more properties this will not be a problem. However, if you are taking money out and plan to live off your rental income, you will be taxed on the dividends you take. The first £2000 dividends is free, but after that you will have to pay dividend tax on what is left. Although dividend tax rates are lower than income tax rates on earnings, the company will have also suffered corporation tax before paying any dividends.

Capital Gains Tax and Stamp Duty Tax Liability

Selling homes when they were owned in the landlord’s name and transferring them to a limited liability company can unfortunately result in a large amount of Capital Gains Tax and Stamp Duty. You should also consider the legal fees, valuations and mortgage fees.

What if you have already chosen a structure but want to change?

It may be that you’ve already chosen a personal ownership structure to operate from but have since changed your mind and concluded that a limited company would be the better option for you. In this case there will be tax consequences involved in transferring ownership to a company such as Capital Gains Tax (CGT) and Stamp Duty liabilities, and therefore we would recommend speaking to one of our property tax specialists who can advise on the main tax areas to address.

Additional factors to consider

There are of course factors other than tax to consider when it comes to buying a property through a limited company. For example, a company structure can ease the transfer of ownership to a family member via shares as opposed to a direct transfer of interests in multiple properties. A corporate structure will also afford the limited liability protection should anything go wrong.

Consider your route forward carefully and whatever your situation the tax savings of buying a property through a limited company will need to be worth it in the long run. It is always best to speak to a specialist tax accountant who can understand the position fully and advise.

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