Learn about the perks and associated downsides of buying a property through a limited company and important tax considerations in this comprehensive guide.
Are you considering buying a property in the UK? You’re likely aware of the fantastic potential for wealth-building that comes with real estate investing, and rightly so. However, what if you were to take your investment game to the next level by purchasing property through a limited company?
The decision to purchase your property via a limited company can be pretty complex, and there are many factors to consider before taking the plunge. A limited company structure has its advantages but also some pitfalls. Whether this is the right move depends on factors such as your short-term and long-term investing goals, tax implications, and any extra costs associated with setting up a limited company.
In this post, we’ll provide an overview of what purchasing UK properties through a limited company could mean for you—the benefits and potential risks—and how to go about it.
What Is a Limited Company?
A limited company is an independent legal entity that can own assets such as property and land. It offers tax advantages over buying property personally and protects from creditors.
The most significant advantage of buying property under a company name is that it typically offers more tax-efficient use of profits. For example, you can avoid paying the 15% Stamp Duty Land Tax (SDLT) on property rental businesses costing over £500,000.
You may also not pay any capital gains tax on property sales profits. Additionally, you may be able to offset certain costs associated with owning the property against your income for tax purposes.
At its core, a limited company provides more excellent asset protection for private landlords than if you buy the property yourself. If things go wrong or you become bankrupt due to owing money to creditors, the company owns the asset and not your estate, so you don’t lose control of it.
The Advantages of Buying a Property Through a Limited Company
From tremendous tax savings to a seamless purchase and sale process, the perks associated with purchasing property via a limited company abound, as we’ll examine below:
1. Tax Planning and Profit Retainment
Setting up a limited company can be advantageous in terms of tax treatment and profit management. For example, suppose you own a property and run it as a limited company. In that case, you can distribute the profits earned to shareholders as dividends, which can help reduce the overall tax bill, and by extension, the business expense.
Let’s say the property generates a profit of £100,000 in rental income. If you’re a sole trader, you’ll pay income tax on the total amount. However, if you run the property through a limited company and distribute the profit as dividends, you’d only pay tax on the dividend income received, which is often lower than income tax.
Furthermore, another advantage of buying property under a company name is that it allows you to accumulate funds from profits as retained earnings, which you can use for future investments or business expansion. For instance, if the property generates a profit of £50,000, you can retain £30,000 as retained earnings and distribute £20,000 as dividends to shareholders. This way, you have funds available for reinvestment or other business needs.
2. Asset Protection
The limited company structure offers some level of protection against creditors. For example, if something happens to your property venture and you have personal liability, your assets may be at risk. On the contrary, if a limited company owns it, any assets held within it will be protected in the event of financial difficulties.
3. Seamless Property Buying and Selling Process
Purchasing and selling property through a limited company is much simpler than through an individual. This is because it’s much easier to transfer ownership of a limited company than of assets held by individuals. At Global Residential, we make this process even more straightforward as our team can help you with all aspects of buying and selling property through a limited company.
We also understand how important it is for our customers to know about profitable UK property options when considering real estate investments. In that light, we recommend you check out our UK real estate listings for some insights or contact us by filling out this form if you seek further advice on buying a property before making any decisions.
Possible Disadvantages of Buying a Property Through a Limited Company
When purchasing a property through a limited company, there are also some potential downsides you might want to consider.
1. Administrative Burden
Building and running a limited company can involve more administration costs and paperwork than buying as an individual. You must adhere to additional regulations, such as payroll administration and filing accounts with Companies House. It’s worth consulting with an accountant to understand the full range of costs associated with such a venture.
2. Tax Consequences
When you buy a property in the UK through a limited company, there are some tax implications you should be aware of. For example, if you sell or rent the property, you’ll pay Corporation Tax on the profit. This differs from the personal income tax you’d pay (after tax credit deduction) if you owned the property.
In addition, if the limited company pays dividends to its shareholders (which would include you if you own the company), different rules apply compared to personal taxes on individual income.
Before committing to any agreement, it’s essential to seek advice from a tax advisor and a property solicitor to ensure you fully understand the tax implications of owning a property through a limited company. This can help you avoid unexpected tax liabilities and ensure your investment is as profitable as possible.
Considerations When Buying a Property Through a Limited Company
While investing in property through a limited company can offer certain advantages—such as liability protection and tax benefits—we recommend looking into the following factors before proceeding with this investment strategy.
Purchasing a property through a limited company requires securing enough finance to cover the purchase price, legal fees, and other associated costs. This may be more challenging than securing financing as an individual, so it’s essential to explore all available financing options and ensure the company has the creditworthiness to secure funding.
2. Administrative Requirements
Administrative tasks include managing the paperwork required for the company structure, such as annual filings, and maintaining accurate financial records. It’s essential to have a plan to manage these administrative tasks and ensure they’re feasible for the company’s resources.
3. Legal Obligations
Finally, there are legal obligations that must be taken into account when conducting business as part of a limited company. This includes complying with company law, meeting tax obligations, and adhering to regulations specific to the property industry. It’s essential to seek legal advice and ensure the company complies with all necessary regulations and requirements before you opt for this option.
Tax Considerations When Buying a Property Through a Limited Company
When buying property in a limited company, it’s imperative to consider the tax implications. To help you make the best decisions, we recommend working with a competent accountant or legal practitioner.
A few of the tax implications you should take into consideration are:
1. Stamp Duty Land Tax (SDLT)
When buying a residential property through a limited company, the purchase might be subject to different SDLT rates. Generally speaking, the rate is currently around 15% and is usually charged on residential properties costing more than £500,000. So, be sure to factor this into your budget when taking on an investment property under a limited company.
2. Corporation Tax (CT)
When investing in a property through a limited company, any rental profits earned from tenants will be subject to CT on profits made before expenses and mortgage interest payments are deducted. While this was slashed from 20% to 19% at the inception of the 2017/2018 tax year, there’s a chance it will spike to 25% come April 2023. Moreover, any money taken from the business as profit will also be subject to taxes at this rate.
3. Capital Gains Tax (CGT)
Profits from selling properties held under companies will usually be considered for paying corporation tax instead of capital gains tax (CGT). In other words, any profit made is subject to CT instead of CGT. This is excellent news if you’re considering selling off some investment properties in the future as part of your portfolio rebalancing strategy; generally, CT rates are lower than CGT rates.
How Does Brexit Impact Buying a Property Via a Limited Company in the UK?
In the last five years, Brexit has undeniably impacted property investment in the UK. Therefore, there are still areas of uncertainty that must be considered when considering a property purchase.
For starters, the pound’s depreciation is one factor to consider. This could lead to lower capital growth in some areas of the UK, mainly if those areas rely heavily on trade with other European Union (EU) countries.
Similarly, changes in regulations and taxation can impact purchasing property through a limited company. Although Brexit won’t likely change much regarding how property is currently bought and sold, legislation could change over time as the UK becomes more independent from other EU countries.
It’s important to note that due to Brexit, certain countries may be more complex in terms of buying and selling investments than before. For example, stamp duty may become more challenging for overseas investors purchasing property through limited companies than it was previously.
Ultimately, consulting with legal professionals specialising in property investments is essential to ensure you’re making a decision based on all relevant information available.
At Global Residential, we understand that buying property can be overwhelming and complicated. That’s why we’re committed to working with you every step of the way to guarantee the best outcome from your UK real estate investments.
Frequently Asked Questions
Is it better to buy a buy-to-let through a company?
It’s sometimes better to buy a buy-to-let through a limited company as they can provide tax benefits, such as the ability to claim complete tax relief on finance costs and potentially lower tax rates. In addition, using a company structure can provide flexibility for inheritance tax planning. However, it’s essential to note that the favourability of buying a buy-to-let through a company depends on individual circumstances and should be based on a thorough analysis of the potential benefits and drawbacks.
Can I live in a property owned by my Ltd company?
Yes, you can live in a property owned by your Ltd company, but it’s often not advisable. Also, if you plan to fund the property purchase using a buy-to-let mortgage, most lenders will likely prohibit you from living in the house.
While a limited company can purchase a residential property, whether or not you can live in a property owned by your limited company depends on a few factors. Since the limited company is a separate legal entity from its directors and shareholders, the property is owned by the company, not by the individual(s) behind it.
If you’re a director or shareholder of the company, you may live on the property if the company allows it, as stated in its articles of association. However, tax implications may be associated with this arrangement, and it’s recommended to seek advice from a tax professional.
Can I transfer my home to a limited company?
Yes, you can transfer your home to a limited company, but it’s not a simple process of just setting up a limited company and signing over your property. You’ll need to conduct a sale of your property to your newly-found company at market value, which will incur some costs, such as Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT). These costs can add up quickly, so it’s essential to carefully consider the financial implications before deciding to transfer your home to a limited company. You should seek professional advice from a tax or legal expert before proceeding with any such transaction.
Wrapping It Up
So, should you buy a property through a limited company or personally? The truth is that it depends on what you’re looking out for.
Buying a property through a limited company offers investors the potential to save money, especially in a longer-term investment, and added tax benefits. However, it’s essential to research and fully understand the advantages and disadvantages of taking this route. Understanding the company, the property, and the available financing options can help you make the best decision for your particular circumstances and ensure you get the most out of being a property investor.
At Global Residential, we have the experience and expertise to help you make the most of your UK property investment, so get in touch today to find out how we can help you to achieve your real estate investment goals.