How to Buy Property with a Limited Company – Important Considerations

Driven by changes to mortgage tax relief rules in the UK, recent years have seen a substantial shift towards investors who buy property with a limited company. 

As a landlord, you can buy properties as an individual and pay income tax. Or you can opt to buy them as a limited company property and pay corporation tax. Each set-up comes with advantages and drawbacks. 

In this article, we take a look at the steps to buying property through a limited company. As well as what it means for investors and the pros and cons versus buying property as an individual. Read on to find out more about buying a property through a company.

What Were the Changes to Mortgage Tax Relief for Landlords?

From 2020, private landlords could no longer deduct mortgage expenses from rental income to reduce their tax bill, significantly eating into their buy-to-let profits. In Central London, the introduced legislation meant that some landlords saw after-tax profits reduced by as much as 40%. 

With after-tax profits substantially reduced, many individual landlords have chosen to change their status. Mainly from paying tax as an individual to a limited company set-up. If you are a landlord with multiple buy-to-let properties or want to buy a second home for personal or business use, you may choose to do so as a limited company. This can deliver some tax advantages.

What are the Benefits of Buying a House through a limited company?

Setting up a limited company may not be advantageous for all individuals. To find out if buying a property through a limited company is tax-effective for your circumstances, it’s important to understand the pros and cons. First, let’s take a look at the advantages of setting up a limited company.

• Profits and Tax

Profits from rental income for private landlords are taxed via income tax alongside other earnings. As private landlords can no longer deduct mortgage expenses from rental income to reduce tax bills, they instead receive a tax credit. This is based on 20% of their mortgage interest payments. Any income you make from rental property is additional to that you received from a salary, shares and dividends and taxed as personal income.

Income above the personal allowance of £12,501 is taxed at a certain rate, listed as follows. Income between £12,501 to £50,000 is taxed at 20%. The Higher Rate between £50,001 to £150,000 has a 40% tax rate. The Additional Rate of 45% applies to those earning over £150,000.

As higher rate taxpayers won’t get their tax back on mortgage payments, by purchasing property through a company they can deduct the cost before paying corporation tax. If your investments in property are via a limited company, you have to pay corporation tax on your profits. Corporation tax is currently 19%, which will rise to 25% in 2023. 

• Mortgage Interest Tax Treatment 

Unlike property owned by an individual investor, when it comes to a limited company for property, mortgage interest is treated as a business expense. This means that investors can deduct the cost of mortgage interest before paying corporation tax. As mortgage payments cannot be deducted from individual tax, this means it may be financially beneficial for certain investors. 

This tax treatment is particularly useful for higher-rate taxpayers, who can make large tax savings by purchasing property through a limited company. 

• Inheritance Advantages

If you’re a landlord planning to pass your portfolio down to children or on to a family member, you can avoid paying large amounts of inheritance tax by purchasing a property through a limited company.

Since 2013, property investors have been able to hold shares which qualify for Business Property Relief in tax-efficient ISA accounts. This form of tax relief is specifically for limited companies and applies to income and assets. To avoid large amounts of inheritance tax, property investors can make family members shareholders of their limited company.

What are the Drawbacks to Buying Property with a Limited Company?

As well as benefits, there are some drawbacks to buying property with a limited company. Here are some of the things you should be aware of.

• Mortgage Availability

There are much fewer mortgage products on offer for limited companies than individuals, because of this it can be much harder to invest in property via a limited company due to the difficulty of arranging a mortgage. At the same time, interest rates are typically higher for mortgages for limited companies than for individuals. 

• Salary is Still Subject to Tax 

If you have a limited company, you may still need to pay yourself a salary to access any rental income you generate. Any salary you pay yourself will be liable to income tax. However, it will count as a cost when calculating pre-tax profit for corporation tax purposes, which can reduce the amount of corporate tax you need to pay. 

If you pay yourself dividends, these are not a business expense. The current tax-free allowance on dividends is £2,000 and what you pay over this amount will depend on your tax band. Basic Rate taxpayers will pay a rate of 7.5%, Higher Rate taxpayers will pay 32.5% and Additional Rate taxpayers have a tax rate of 38.1% on dividends above the allowance. 

If you plan to live off rental income, you will need to calculate whether having a limited company will reduce your tax bill. Often a tax accountant will help maximise your tax efficiency.

• Transferring Properties can be Costly

If you want to transfer property into limited company, there is a set legal process to follow. As you are effectively selling your properties to yourself, a number of fees will apply, including the following:

Capital Gains Tax

Any profit made on a property is subject to capital gains tax. The amount you pay will depend on how much income tax you pay on an annual basis. Basic tax payers are subject to 18%, while higher earners are subject to a 28% tax rate. 

Stamp Duty

Stamp duty is charged as a percentage of a property’s value. As your investment property is not your main residence, there is a further 3% tax as it falls under the second home category. 

Fees

Just as you were selling your property to another buyer, you’ll need to arrange for a conveyancer and solicitor to ensure the switch is legal. 

Administration 

Limited companies need to file annual accounts so you will need to hire an accountant. There is also often additional paperwork and administration.

Is it More Tax Efficient to Buy Property with a Limited Company?

There are tax benefits to buying through a property limited company when compared to purchasing property as an individual. If you’re a private landlord, any rental income will be taxed as income, with a top rate of 45%. If you own a property or properties through a limited company, you’ll have to pay corporation tax on your profits, which is currently 19% – for some investors this can mean large savings. 

As the owner of a limited company you only pay tax on profits withdrawn from the company. Anything that isn’t taken from the company isn’t taxed.

Should you Buy your First Property Through a Limited Company?

The question whether to buy property through limited company or personally will depend on many factors. The decision to  purchase your first property through a limited company will depend on your goals as an investor. If your plans stop after buying one or two properties, the extra work of setting up an Ltd. may not be worth it. Although if you plan on buying multiple properties, it may be easier and cheaper to set up an Ltd. from day one.

If you already have several properties and you’re considering transferring them to a limited company set up, it might be worth it if you have a portfolio that is large enough. You will need to weigh up the costs against the tax savings you could make. It’s also a good idea to find a good tax accountant who specialises in property. 

Does a Limited Company Pay Stamp Duty on Property?

Limited companies still need to pay 3% stamp duty on top of the standard rate on any property purchased above £40,000.

If you incorporate a property portfolio and need to transfer ownership from an individual to the limited company, you still need to pay stamp duty and capital gains tax. Stamp duty applies whether cash or shares are given and whether the properties are gifted to the limited company. 

How to Set up a Limited Company to Buy Property UK

Before you can purchase a property, you’ll need to incorporate a company by registering a limited company with Companies House and registering for taxes with HMRC. You’ll also need to set up bank accounts in the company’s name. As well as make sure you have the right insurance in place. 

The next step in buying a house through a company is to choose a name for your company. Many investors incorporate using their name or have the word “property” in the company name. You’ll need to have a registered office for your business. This can be your home address or one provided by your accountant. A company’s registered office details are in the public domain so you may want to consider any issues of privacy. 

You will need to name one company director when setting up your company. Directors are responsible for meeting legal requirements and keeping annual accounts up to date. You should also name any shareholders. Shareholders typically have voting rights and influence over the running of the company. Shareholders get dividends on the amount of shares they hold. How you distribute company shares is an essential part of running a business as tax-efficiently as possible. 

If you’re interested in buying property though a limited company, in certain situations there are advantages from a tax perspective. With any investment it’s important to weigh up the pros and cons and thoroughly do your research. If you’re just starting out with your first property and don’t have plans to invest in more, operating as a limited company buying property may not be advantageous. To find out more about buying property as a limited company, get in touch with our experts.