If you’re looking to buy property for investment purposes, it is well worth considering setting up a limited company. Limited companies can be a more tax efficient and more secure way of holding properties. In this article, we’ll explore the advantages and disadvantages of a limited company and how to set one up.
Advantages of a Property Investment Company
Tax Efficiency
Limited companies pay corporation tax on property income. As corporation tax can be lower than paying income tax (depending on your profits vs your personal income) there will likely be tax savings when moving property into a limited company.
Corporation tax rates depend on the level of profits but currently range from 19% – 25%. Whereas personal income tax rates are currently:
- 20% for basic rate taxpayers.
- 40% for higher rate taxpayers.
- 45% for additional rate taxpayers.
As a Director of a limited company you can save personal tax by undertaking tax-efficient ways to pay yourself from the limited company in comparison to personal tax you would pay if properties are owned personally.
For example, as a property investment limited company owner you can take a combination of salary and dividends, with dividends attracting a lower rate of tax than salary alone. You could also add your spouse as a non-executive director or shareholder to your limited company to gain additional tax benefits and savings on income tax by using their tax-free allowance, lower tax thresholds and by them drawing dividends from the limited company.
If you retain cash reserves in your property investment company, these could be later reinvested into additional properties. Additional rental income from these properties could be paid out as dividends to you and your spouse or used to contribute to director pensions.
Mortgage Interest Relief
Landlords that personally own and rent out properties can no longer directly deduct any mortgage interest from their rental income to reduce their tax liability. Instead, this is done by giving the individual a 20% tax reducer. Because of this change higher rate and additional rate taxpayers miss out on further tax reductions. However, when owning and renting in a property investment company, the mortgage interest is fully deductible, meaning tax is saved.
Planning
Flexibility in managing personal tax through dividend income. As income tax becomes due when you take money out of a limited company, you can control how much you take out in a given tax year to keep within a lower tax threshold. This can be particularly attractive if you’re looking to buy a portfolio of properties over time.
Limited Liability
Owning and investing in property as a sole trader means that you will be personally liable for any debt, losses or legal disputes. You will also be personally liable for business loans, and this may impact your own individual credit rating.
Setting up a property investment company provides legal separation between individuals and the business. A limited company limits your personal liability as the company is a separate legal entity and the company is responsible for any debts, financial losses or legal disputes. Business finances and personal finances remain separate in a limited company and business assets will be held within the company. Within a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.
Succession Planning
Property held within a company gives more options when it comes to planning for inheritance tax.
If you plan to pass your business on to your family in the future, it’s much simpler to transfer a property investment company than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.
Ownership of the company can change over time by changing number of shares owned by different individuals.
Further advantages to consider include
Professional Image
Enhanced credibility with tenants, partners, and lenders.
Multiple Shareholders
Allows investment with partners or investors.
Ring-fencing Profits
Profits can be reinvested or used to pay debts within the company.
Separation of Finances
Clear distinction between personal and investment financ
Disadvantages of a Property Investment Company
Administrative Costs
There are a number of accounting and tax filings required ie annual accounts, corporation tax returns, self-assessment tax returns and Confirmation Statement. At Low Cost Accounts, we can complete these all for you for a low fee.
You will not own the Properties
Properties owned in a limited company, will not be owned by you as an individual. Instead, you will own shares in the company. This can give rise to complications with mortgages, mortgage interest and mortgage lenders.
Mortgage Costs
The cost of commercial and buy-to-let mortgages may be slightly more expensive due to higher interest rates and lending fees.
How Low Cost Accounts can help
Whether you’re a buy-to-let landlord, individual landlord, corporate landlord, property dealer, estate management, non-resident investor, or a second property owner looking for a property accountant, we have packages and accounting services to suit your every landlord and property need. We provide expert advice from our accountants and tax advisers as part of our accounting services.
If you need any help with setting up a company for your property business, Low Cost Accounts can help you in registering your company in the UK. Our comprehensive packages include company formation, a dedicated accountant and full management of all your deadlines.