If you are a business owner, contractor or an independent professional operating through a limited company, you may have considered buying property through your business. In recent years, there has been a substantial move towards buying property through limited companies. Although you can purchase property through a limited company, it is vital to look at the benefits and drawbacks before making this decision.
What are the benefits of buying property through a limited company?
A significant benefit is the tax treatment of profits. For private landlords, profits from rental income are taxed via income alongside your other earnings. However, if you choose to buy property through a limited company, the profit you make will be liable to corporation tax instead, which is currently 19%. Therefore, if you are a higher rate taxpayer, you would be set to make large tax savings by purchasing property through a limited company.
Additionally, private landlords can no longer deduct their mortgage expenses from rental income to reduce their tax bill. Instead, they receive a tax-credit based on 20% of their mortgage interest payments. This means additional or higher rate taxpayers won’t get all their tax back on mortgage payments as the credit only refunds tax at the basic rate. However, mortgage interest is treated as a business expense for limited companies, which means by purchasing property through your company, you can deduct the cost before paying your corporation tax.
Lastly, if you are a landlord planning to pass your property portfolio down to your children or other family members, buying property through your limited company would be a great way of avoiding large amounts of inheritance tax by making family members shareholders of your limited company.
What are the drawbacks of buying property through a limited company?
The main drawback you may face is finding a suitable lender. The majority of buy-to-let lenders will not lend to limited companies and if they do, they will often want the directors of the company to enter into a personal guarantee. You may also find that the interest rates are higher on such mortgages.
Furthermore, unless you have set up your company before purchasing your property, you would need to transfer or sell your property to your new company. This would trigger capital gains tax as it is likely the value of your property would have risen since you first purchased it. Stamp duty would also be payable on a repurchase of the property.
Finally, to access your rental income, you would need to either pay yourself a salary or dividend. These payments will be liable to income tax and rental profits taken as dividends will not be considered a business expense.
Key considerations before purchasing property through a limited company.
- Your income - if you buy property as a higher or additional rate taxpayer, you will be liable to pay income tax at 40-45% however, by purchasing property via a limited company, you will only be subject to pay corporation tax at 19%.
- Whether you already own property - you should consider whether it would be worth transferring property to your company. This will depend on your property portfolio as if you own several properties, the costs to transfer each of these properties to your company may outweigh any benefits
- Whether you already own a limited company – if you do not already own a limited company, you should consider whether it would be worth setting one up and consider the costs involved in running this company. If you are only planning to rent out one or two properties, setting up a limited company may be excessive and you should consider taking professional advice on this point.
For more information, please contact Emma Elkington or Matthew Morris-Ashton in our Commercial Property Team.
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This article is current at the date of publication set out above and is for reference purposes only. It does not constitute legal advice and should not be relied on as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.