The property market has proven itself a fantastic investment medium for many. With the right strategy and good decision-making, property investors can maintain a steady inflow of revenue.
If you make a bad decision or miss out on an opportunity, your investment may perform below the expectations you’ve set. Hence, property investors and landlords are always on the lookout for ways to optimise their property choices.
One of the things investors need to consider carefully is choosing between buying property as a limited company or as a private individual. That’s because each has its pros and cons and may be more suitable for certain individuals and specific conditions.
In this guide, you’ll discover the advantages of buying property under a company name, the downsides, and tips to help you decide your next steps.
Why are Landlords Buying Property With A Limited Company?
In the past, most people bought and invested in the UK property market under their own personal names without even considering alternatives, but that is no longer the case. Recent years have seen more people buying properties as a limited company.
The reason behind this can be attributed to the recent changes around mortgage tax relief regulations introduced in 2015 by George Osborne. The former Chancellor of the Exchequer introduced the rule to encourage more public landlords in the UK.
The new regulations meant private landlords could no longer reduce their tax bill by deducting mortgage expenses from rental income. As a result, landlords have to contend with considerably reduced after-tax profits, sometimes as much as 40 per cent.
While the rule did what was expected to some extent, it also led to private landlords to seek alternatives. For example, many had to switch to paying taxes as a company rather than as an individual. Therefore, those individual landlords were now paying corporation tax, which meant lower tax rates, especially for higher-rate income taxpayers. Today, landlords are more likely to buy properties using a limited company to qualify for lower rates than the income tax rate.
What are the Advantages of Buying Property Under a Company Name?
In case you’re considering buying property as a limited company, you may want to know the benefits before you commit. There are a couple of them, but you’ll find the most important ones below.
Profits Tax Treatment
Tax savings are the main advantage of buying property under your company name.
Higher-rate taxpayers have to pay 45% of their rental income as tax. That’s because taxes are calculated by comparing your income to your personal allowance. The current standard personal tax-free allowance is £12,571. However, this amount decreases for people earning more than £100,000.
Anyone earning between £50,001 and £150,000 is liable to pay the basic tax rate (20% of their earnings). Those earning between £50,001 and £150,000 are high-rate taxpayers liable to a 40% tax, while anyone earning more than £150,000 will pay 45%.
As an individual property owner, all the profits you make from your properties are added to your other salaries and earnings to calculate tax. That also includes the amount received in shares and dividends. Therefore, you may pay as much as 45% tax if your income exceeds your personal allowance.
On the other hand, investing in and buying property with a limited company attracts lower corporation tax rates of only 19%. This means you can save a sizeable amount of money using a limited company rather than paying 45% of your earnings as tax. Note that the corporation tax rate is set to rise from 19% to 25% by 2023.
Tax Benefits from Mortgage Interest
It was formerly possible to offset your income tax through mortgage tax relief, which was made available to private investors. You could claim mortgage interest tax relief at the same rate as your income tax, up to 45% for higher-rate taxpayers. In 2017, this stopped being the case, when gradual reduction began. As a result, individual landlords can no longer reduce applicable tax bills by deducting their mortgage expenses.
In it’s place, you get a tax credit that depends on your mortgage interest payments. Note that the tax credit will return tax using the basic rate, while higher-rate and additional taxpayers will not get the rate they paid.
Additionally, you may end up with a higher tax level since you also have to declare the income for taking care of the mortgage.
To prevent higher taxes, you can buy properties as a limited company. Limited companies’ mortgage interests are considered business expenses. So, they get the opportunity to offset their income by deducting mortgage interest.
Tax Benefits for Inheritance
Another advantage of buying property under the company name is to minimise the inheritance tax to be paid by the members of your family.
If you’re planning to pass down a property to family members, you could help them reduce the inheritance tax they pay by buying property as a limited company. This is possible through the application of Business Property Relief (BPR).
Property investors are allowed, by law, to hold shares that qualify for BPR through an individual savings account that’s tax-efficient. Sole traders and public companies are not allowed to access BPR. For public companies, this is because their shares are available on the stock exchange, while sole traders are prohibited if their fixed assets will be transferred.
What are the Disadvantages?
The tax advantages stated above make buying property with a limited company an excellent idea, but you may want to consider checking the other side of this coin. There are certain disadvantages and expenses to incur when you operate as a limited company, and we’ve listed them below.
Mortgage Availability and Higher Fees
If you are applying for buy-to-let mortgage products through a limited company, you should consider that there may be hidden fees. It is also likely that you will need to search a bit longer to find the right place for you.
Lenders demand relatively higher interest rates and larger deposits from limited companies because it’s considered riskier than individual buy-to-lets. As far as availability is concerned, offers for buy-to-let mortgage products for limited companies are also scarce. Hence, getting a mortgage may prove challenging.
Fees for Transferring Properties
Switching ownership of a property has to be done through the appropriate legal processes. Therefore, this may attract extra expenses like stamp duty, capital gains tax, conveyancer fees, etc.
Transferring properties may also change the mortgage, requiring you to make repayments earlier than previously thought or leading to extra expenses. These are the expenses you may have to pay.
- Capital gains tax
If you’ve bought your property before setting up the company, you’ll be required to sell your home as an individual to yourself as a limited company. This necessitates paying capital gains tax if there’s been a rise in the original property value.
Depending on your annual income tax, you also have to pay capital gains tax on your traditional investments. Basic rate taxpayers will pay around 10% and 18%, depending on their income, while higher taxpayers have to pay 28%.
- Stamp duty land tax
The stamp duty land tax is a standard charge payable on a property repurchase based on its worth. Also, purchasing a second home attracts an additional 3% fee on the stamp duty rate.
- Conveyance and solicitor fees
Like deals between two individuals, you’ll have to pay standard fees like the solicitor and conveyancer fees. These are compulsory to legalise the change from an individual investor to a limited company.
- Additional mortgage costs
Even if you’ve just started paying off your mortgage, lenders may charge a fee, usually between 1% and 5%, for repayment.
- Extra Cost and Hassle
Some additional costs and tasks come with running – or even setting up – a limited company. Costs include accountant fees for annual accounts, administrative tasks, and paperwork.
There are advantages to buying property with a limited company, hence the recent massive shift of investors to this route. However, this method also has its downsides. When choosing between buying property as a limited company or as an individual, there may be no straightforward answer. You must carefully weigh up all details, both simple and complex, which are individual to you.
While the former may be perfect for some, it might not be for you. As with many decision-making processes concerning property investment, property experts need to walk you through the whole process.
Do not assume. If you’re looking to buy an investment property in Liverpool, Manchester, London, Bolton, or Burton, get in touch with us today. Learn more about the best property-buying method that will work for you.
Frequently Asked Questions (FAQs)
Is it better to buy a property through a limited company?
Yes, this can be a good idea for many property investors to reduce tax payments. However, buying through a limited company is accompanied by certain costs worth looking into before making a decision.
What is the advantage of buying a property under a company name?
The main advantage of buying property under a company name is reduced tax payments, especially for higher-rate taxpayers. You also get to offset your mortgage interest and reduce tax payments for inheriting family members.
Should you buy property as a limited company or in your personal name?
Each comes with benefits and disadvantages. Consult an expert to help you weigh up your options.
Does a limited company pay stamp duty, and how much stamp duty do they pay?
Yes, a limited company has to pay a standard charge based on the property’s worth and a 3% surcharge on the stamp duty rate.