Buying your first property through a limited company

Benefits of Buying a Property through a Limited Company

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The Benefits of Buying a Property through a Limited Company

Until 2015 there wasn’t much reason for buyers to go to the complication of setting up a limited company to buy, let, or flip rental properties. However, that year's budget introduced several changes that made buying buy-to-lets and growing property portfolios a sensible choice for many landlords and developers.

Ultimately, buyers will have to navigate their figures and investments with a specialist tax accountant to determine if they’d be better off buying as an individual trader or a limited company.

We strongly suggest that taking professional advice regarding your unique figures is essential before making any buying decisions.

The advantages of buying property through a limited company

Savings made through Corporation Tax over Income Tax

A private landlord's income works like most typical businesses, paying income tax on their yearly rental profits on top of their other earnings.

The current income tax rates are:

Basic Rate - 20%

£12,501 to £50,000

Higher Rate - 40%

£50,001 to £150,000

Additional Rate - 45%

Over £150,000

However, if you operate your investment through a limited company, the business pays corporation tax on its profits, currently only 19% but rising to 25% in 2023 for profits exceeding £250,000. So for companies with profits between £50k and £250k this year, the exact rate will be calculated according to the profit and charged between 19% and 25% rates.

As you can see, investors can stand to make quite a saving for those with the higher and additional income tax rate. However, it’s not as simple and straightforward as it appears. We’ll discuss the less advantageous sides of the system a little later in this article.

Higher rates of tax relief on mortgage interest

The next advantage for company owners is that they can claim all of the interest on their mortgage as a business expense—something individual buyers lost the right to, finally, in 2020. Now, they can claim a mere 20% tax credit on their mortgage interest.

Limited liability opportunities

With the right system in place, a limited company takes on the risks of the business’s successes and failures. That way, the shareholder's personal wealth and investments remain safe if things go awry.

Reduced inheritance tax when passing property to family members

Another reason to consider building your buy-to-let business as a limited company is if you’re end game is to pass those properties on to family members as an inheritance. As a company, there are various methods of avoiding paying inheritance tax, using trusts, shares, and alternative opportunities not available to individual landlords.

Profits are easier invested back into the business

When expanding a portfolio to multiple assets, buying more properties using the company’s capital can mean shareholders avoid paying more tax than they have to. After paying the corporation tax, profits are invested in the business to do as they please. Individual landlords must pay income tax on that capital before it’s reinvested.

So, what’s the best way to buy a property? In a ltd company or as an individual? It’s not a simple decision by any means.

The downsides of buying property through a limited company

Taking your share of the income

As a sole trader, adding your buy-to-let earnings to your tax return is a relatively standard procedure.

As a shareholder in a limited company, when you decide to take profits as earnings, despite the company already paying corporation tax, you’re still subject to income tax for your drawings. You’ll need to be a PAYE employee, and you and the business will be subject to the usual tax and national insurance contributions.

However, if you don’t plan or need to take an income or too much money from the fund, shareholders are entitled to up to £2,000 tax-free in dividends. Above the £2,000 threshold, there’s a 7.5% basic rate and a 38.1% higher tax rate.

Additionally, adding shareholders to your company is a simple process, so expanding the number to include your partner, spouse, or children allows access to further tax-free payouts.

No Capital Gains Tax allowance

Not all the tax opportunities fall in favour of the limited company. For example, one of the tax allowances available to individual investors that isn't available to limited companies is through capital gains. Often, the capital gains tax allowance can play a significant factor in selling properties and could make all the difference depending on how you plan to operate your limited company.

Adding property can be problematic

If you’re setting up your company and business from scratch, buying your first property through a limited company should be reasonably straightforward, as will adding properties to your portfolio. But, if you want to transfer previously purchased properties into your limited company, you’ll have to buy and sell them to yourself, covering capital gains and stamp duty land tax, legal fees, and any early repayment fees on your existing mortgage.

There will be a break-even and advantageous point depending on the number of properties, their value and mortgage amounts, and the tax savings they’ll accrue.

You may also struggle to get the same mortgage deals as you would as an individual investor.

Limited mortgage availability

Not too long ago, tracking down competitive mortgages was far trickier for limited companies. However, with so many buy-to-let operators and developers switching to the practice, lenders and brokers have far less problem providing deals for these borrowers.

There are probably still fewer lenders available to limited companies than individual investors at the moment, but as long as you meet their borrower criteria, it shouldn’t be too much of an issue.

Additional costs and pressure on resources

Finally, if the figures are tight and resources are low, it could be the difference between whether it’s worth it or not. You’ll need to provide more paperwork, annual company accounts, and pay for the professional accountancy necessary to maximise benefits and earnings.

Notes on buying a residential property through a limited company

It’s by no means impossible for a limited company to buy a residential property for a director or shareholder, but there are specific caveats.

Stamp duty land rates will be higher, and tax implications can become complex considering Benefit in Kind legislation. Also, it’s incredibly unlikely a lender providing a buy-to-let mortgage will allow you to use the property as your residential home.

For the director to live in the ltd company property, they would need to pay rent to the company at the market value. Any difference would be considered Benefit in Kind and susceptible to taxation.

As possible workarounds, a director may pay a mortgage using their dividends, organise a method of share transfer to cover the cost or repay a loan to the company at no less than the official current rate.

This is a complex situation and needs to be checked if it’s permissible within company articles and if any further legal charges need registering against the title of the property.

Once again, we urge our readers to consult an appropriate professional accountant and property solicitor.

In conclusion

We can’t say whether you’re better off buying through a limited company or as an individual.

It could be a good move if you’re a trader buying houses to renovate, upgrade, and flip for profit.

It could also be a good move if you’re operating in the highest income tax brackets and planning on buying multiple buy-to-let properties as long-term investments.

However, for each case, only a professional tax accountant can work through all the facts and figures to determine your ideal opportunity and property plan for the future.

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Gemma May

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Gemma May
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