What are the Benefits of Buying Property in a Limited Company?

There are, however, more challenges for buy-to-let investors, with increased regulation, stamp duty land tax and decreased tax relief, which impacts upon the revenue from a rental property.

In order to mitigate the impact on rental revenues, more buy-to-let property investors are purchasing their investment property in a limited company, with 77% of buy-to-let mortgage applications in H1 2019 made through limited companies. This is because companies pay corporation tax on profits as opposed to paying income tax as an individual, which presents the opportunity to increase post tax income.

Please note that every individual's tax liability will be different; therefore, it is worth seeking independent tax advice before making your decision to invest in property through a limited company.

Benefits of Property Investment in a Limited Company

Improvement in Tax Efficiency

Owning a property within a limited company can provide tax benefits and efficiencies, especially if you are a higher rate tax payer, or, if you are building a property portfolio.

If you own a property as an individual, the profit from the rental property is combined with your other earnings and taxed as income. If you own a property within a limited company, the profit is instead taxed under the current rate of corporation tax, which in most cases provides an immediate saving. As a Company Director, you can then decide if you invest the profit into additional properties, invest into your pension, or, pay a dividend.

Building an Investment Property Portfolio

If you plan to build your property portfolio, profits can be retained within your company to invest into your expansion, without being subjected to income tax.

Retention of earnings within your company helps to protect from tax liabilities, so you have the choice to repay mortgages and invest in your portfolio expansion more expediently.

Inheritance Tax Planning

If you hold your property within a limited company, it provides you with greater flexibility with inheritance tax planning. It is much easier to transfer shares in a limited company to your family than transferring ownership of a property owned privately as only the ownership of the company is transferred and not the ownership of the property. This could also protect from stamp duty land tax charges in transferring ownership, inheritance tax and capital gains tax liability.

Disadvantages of Property Investment in a Limited Company

No Capital Gains Allowance

Currently, when a limited company decides to sell property it does not benefit from the capital gains tax (CGT) allowance that an individual would receive, however, there are government proposals to decrease CGT allowances for individuals.

The increased tax efficiencies over the period that the property is owned by the limited company should offset this additional charge.

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Tax on Dividends

If your rental profits are to all be taken out of the company to be used as an income, you will be taxed on the dividends that the company pays, however, individuals have a personal tax-free dividend allowance.

 Mortgage Rates & Lenders

Buy-to-let mortgage lenders tend to charge higher rates of interest for mortgages on properties owned by a limited company, when compared with rates for individuals. It is worth shopping around to get the best rate and with more property investors buying within limited companies, the market we trust that the mortgage lenders will adapt to meet the changing marketplace.

The positive aspect is that with the tax efficiencies investing in property in a limited company, lenders stress testing when assessing a mortgage application can be more favourable when compared to individuals applying for a buy-to-let mortgage.

Specialist Accountants

Operating and maintaining a limited company comes with legal responsibilities for Directors to keep accurate company and financial records, submission of accounts and returns to Companies House and HMRC. Finding a accountant who specialises in managing accounts for buy-to-let investment companies is crucial to keep your costs for managing your company at a reasonable level. Speak to one of our team today for a recommendation.

Limited Company Specifically Designed for Buy-To-Let Property Investment

A company that's purpose it to hold property for buy-to-let property investment is called an SPV (Special Purpose Vehicle)as the company does not carry out and trading activity, whereas a trading limited company would have a primary activity other than simply owning a property. When assessing buy-to-let mortgage applications, lenders will in most cases require the company to be an SPV, so they don’t have to take into consideration the other risks of the trading activity of the business.

Incorporating Your Limited Company

The first step is incorporation of your new company with Companies House and registering with HMRC for tax. You will need to allocate shares to Shareholders, who receive dividends (if dividends are paid) based upon how many shares they hold. It is fairly typical for members of the family to be distributed shares within the company, making full use of the tax free allowance.

Once the company is registered, you as the Director, will have the responsibility for keeping accurate records, annual returns, submission of accounts to HMRC and Companies House, etc. This is something that can be managed by an accountant, however, you will remain personally responsible; therefore, you need to carefully choose an accountant who specialises in buy-to-let property investment through limited companies.

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