Purchasing property through a limited company has become an increasingly popular strategy among investors and landlords in the UK, as this approach offers several advantages, including tax benefits and liability protection.
However, the strategy also comes with its share of complexities and potential drawbacks. In this post, we’ll explore the advantages and disadvantages of buying property through a company, discuss the tax benefits, liability protection, potential cost savings, and outline the process, legal requirements, and implications for company directors.
Advantages of using a company to buy property
Owning property through a limited company, rather than holding it in your own name, comes with a fair number of benefits.
Tax benefits
One of the most significant advantages of purchasing property through a company is the potential for tax savings.
- Lower corporation tax: Companies pay corporation tax on their profits, while landlords pay income tax. Corporation tax (20-25% depending on your exact profit) is typically lower than income tax (20-45% on different portions of your income). For higher-rate taxpayers, owning your portfolio through a company can result in substantial savings.
- Mortgage interest relief: Individual landlords can only receive a tax credit equivalent to 20% of the interest they pay on mortgages. Companies, on the other hand, can deduct the full cost of interest from their pre-tax profit, resulting in a smaller tax bill.
- Dividends: Company profits can be distributed among shareholders as dividends, which are taxed at a lower rate than income tax. If you own property in your own name, you cannot pay yourself in dividends, so you’ll have to contend with a higher tax rate.
Liability protection
Buying property through a limited company also offers you limited liability, which means that directors and shareholders are only liable for the amount of money they themselves have invested in the company. This means your personal assets will be protected if your company faces financial difficulties.
Inheritance tax planning
Using a company can facilitate more efficient inheritance tax planning, as instead of transferring the property itself to your beneficiaries, which can be tax-efficient, you can transfer shares instead, potentially reducing your inheritance tax liabilities.
Disadvantages of using a company to buy property
Now you know the advantages of using a company to buy property, let’s go over some of the drawbacks of the approach.
Additional costs
Purchasing property through a company can incur additional costs, most notably:
- Setup and administration: Establishing a company involves registration fees and ongoing administrative fees, typically including accounting, auditing and legal fees.
- Mortgage costs: Mortgages for companies often come with higher interest rates and stricter lending criteria compared to personal mortgages.
Regulatory and compliance requirements
Operating a company involves adhering to a number of regulatory and compliance requirements, particularly annual accounts filing. It also requires setting up the company in the first place, which can be quite complicated.
Less beneficial tax treatment
While most companies will benefit from the lowering rate of taxation that companies enjoy because of corporation tax, there are some downsides:
- No capital gains tax allowance: When selling a buy-to-let property, individuals pay capital gains tax (CGT). However, they can use the CGT annual allowance, which is £3,000 for the 2024/25 tax year. Companies are not eligible for this allowance as they pay corporation tax. Depending on your situation, this could result in a slightly higher tax bill.
- Stamp duty surcharge: When buying residential property in England or Northern Ireland, you pay an additional 3% on top of the standard rate of Stamp Duty Land Tax on all property purchased above £40,000. A flat rate of 15% SDLT applies when companies buy residential property for more than £500,000.
- Transferring your property: When you set up a company, you will have to transfer your property from your ownership to the ownership of your company. This usually triggers a CGT charge as you are technically ‘disposing’ of your property.
How we can help
Owning property through a limited company has many advantages and disadvantages. To maximise the benefits and minimise the drawbacks, seeking the guidance of an experienced accounting firm like us is a great idea.
From setting up your company to helping you with your taxes and annual accounts, we’ll help out wherever we can.
Get in touch with Langdowns DFK today to start running your property portfolio in a more tax efficient way.
