The most significant change that has taken place during our time in property is a major and unexpected shift of people wanting to purchase properties through their limited companies.
Up until around 2015, there was no real need for most people to buy through their limited company plus mosy corporate mortgages were far less affordable than personal mortgages.
In summer 2015, improvements to interest rates charged on commercial mortgages improved making the purchase of property through a limited company more appealing than ever before. According to mortgage providers in the UK, some 80% of new mortgage applications are now for limited companies and not private individuals.
It’s still not going to be for everybody, but it’s something every investor should consider. Getting the ownership arrangement right could make a big difference to the total amount of tax you will pay over your lifetime (and beyond) – so let’s look at the advantages and disadvantages of buying a property through a new or existing limited company so you can decide for yourself if it’s something you should be considering or avoiding.
A brief disclaimer before we do, though: this is not tax advice. I’m just sharing general knowledge, not making any kind of suggestion. If it’s expert tax advice you’re looking for then, we recommend that you look for a taxation expert online. Specialist property tax advisors only deal with property owners and have advised hundreds of people on whether or not they should invest in property through a business or not.
ARE YOU A TRADER OR AN INVESTOR?
The first significant distinction to make when making this decision is whether you are a property trader or an investor.
If you’re looking to buy a property to make value-added changes and sell it for profit, you’re a dealer. In this situation, you’re probably better off buying as a limited business.
Why? Because by selling assets as a limited company, you pay income tax on your earnings – you can find the latest rate here. If you had purchased a property to “flip” as a person, your earnings would be taxed as profits – which, if you were taxed at a higher rate, would be a lot more (current rates here).
(As a person, you would be able to have the profits viewed as a capital gain rather than income – if you could show that you wanted to rent the property out, and maybe you did so for a short time before you sold it, but let’s leave that one for now.)
If you’re buying a property to collect the rent and watch its value increase in the years that follow, you are an investor. Most investors have traditionally acted as sole traders, but many will now profit from the use of a limited company.
WHY WOULD INVESTORS WANT TO USE A LIMITED COMPANY TO BUY PROPERTY?
From a strictly financial viewpoint, there are three obvious explanations why you may choose to keep your property as a business rather than yourself.
1. TAX TREATMENT OF PROFITS
If you buy a property in your own name, the money you receive from renting it will be calculated up with your other earnings (such as your work) and charged as income tax. But if you keep it in a business instead, the income would be subject to corporate tax instead.
The rate of corporate tax appears to be around half of the higher rate of income tax – an immense saving.
You’ll always be taxed on dividends if you take income out of the business (which we’ll see later), but there’s flexibility: you can schedule the dividend payments for optimum tax-efficiency, or allocate them to family members who are just basic rate taxpayers – or just let the income roll up inside the business to purchase the next house.
2. TAX TREATMENT OF MORTGAGE INTEREST
Mortgage interest would no longer be a permissible cost for individual property owners as of April 2020 (instead of claiming a simple rate allowance) but will continue to be permissible for companies holding properties.
The bottom line is that if you pay tax at a higher rate and use mortgages to purchase property, your tax bill would be higher if you own properties on your own rather than in a business.
3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX
Property owned within a corporation offers more flexibility when it comes to organising the Inheritance Tax. It’s all way above my pay grade (and you can take advice from a specialist tax advisor if passing on assets is an essential part of your plans), but you can make use of trust arrangements, various forms of shares, and all sorts of clever approaches that you wouldn’t otherwise have access to.
So if there is an income tax advantage, a mortgage care advantage, and possibly an Inheritance Tax advantage, why wouldn’t you invest in a limited company?
There are also downsides, of course.
REASONS NOT TO INVEST IN PROPERTY THROUGH A LIMITED COMPANY?
1. MORTGAGE AVAILABILITY
This used to be a major drawback: corporate mortgages were small, costly and had much lower borrowing limits.
The amount of products on offer for limited business’ is still much smaller and more limited than for individuals, but it is changing rapidly: as more and more buyers are moving towards this direction of buying, lenders are following the trends to attract their custom.
You’re always going to have to offer a personal guarantee, and your own assets are going to be scrutinised, so it’s a personal mortgage in several respects except in name: think of the business as a “tax wrapper.” So while you’re not going to have as many options to choose from, and the interest rates and fees could be higher, it’s far less of a dealbreaker than it used to be back in 2015.
2. PAYING DIVIDEND TAX WHEN YOU TAKE THE MONEY OUT
If you leave the rental gains in the business, there is no question: you’ll pay corporate tax and leave the post-tax income to roll up – maybe to buy more assets in the future.
But if you take the money out (for example, to spend on your own living costs), you’re going to be taxed on the dividends you take. That means you’re going to pay income tax first, then pay a hefty dividend tax on what’s left (current rates here) to cash everything out.
But if you want to live off your income from property rather than leave it to accumulate, it’s going to be a bit of a toss-up. You’re going to save taxes in some cases, but pay additional taxes in others. You’re going to have to run the numbers to figure out what’s going to work best in your case.
3. EXTRA COST AND HASSLE
Not a big deal, but there are higher accounting expenses involved with reporting annual business reports – so that’s an expense to add in, and your life would be full of more paperwork than it might otherwise have been.
HOW TO DECIDE IF BUYING PROPERTY THROUGH A LIMITED COMPANY IS THE BEST OPTION FOR YOU
What side of the fence you come down on when it comes to buying through a limited company would primarily rely on three factors:
HOW MUCH INCOME DO YOU HAVE?
If you’re paying a higher rate of income tax, and you don’t have a lower-income spouse whose name could be included for the purposes of your property income, the appeal of paying a much lower rate of corporation tax is going to be high.
Keep in mind, though, that if you are actively purchasing assets, your portfolio will generate a paper tax loss rather than a benefit – so, with preparation – taxable profits could be deferred until you retire and your income drops.
DO YOU NEED THE INCOME FROM YOUR PROPERTIES TO SURVIVE?
Having it rolled up in the business (for potential purchases, or just before your non-property income falls) would leave you better off than if you need to take it out to spend.
DO YOU USE MORTGAGES?
The right to deduct all of your mortgage interest as operating expenses (once the new laws are in place) would be a big reason for using a business for higher-rate taxpayers.
WHO ARE YOU BUYING PROPERTIES FOR?
Initially, of course, it’s you, but what’s your exit strategy – are you planning to sell them to fund your costly cruise habit in your later years, or is it vital that you pass on your portfolio to your children or grandchildren?
If it is necessary for you to pass on your assets, keeping them in a company (if properly structured) could result in huge inheritance tax savings.
SO THE ANSWER TO WHETHER IT’S A GOOD IDEA OR NOT – IS OF COURSE ” IT DEPENDS”
If there’s one thing we’ve discovered, it’s that there are a lot of different variables at play – so you need to know that compromise is inevitable, and you should weigh up all the pros and cons before you determine which side of the fence to come down on.
Until you do so, you can absolutely talk to your accountant: instead of this post being the end of your study, just use it as a way to get up to speed with the details so that you can have a fruitful discussion with an expert.
If you would like expert tax advice, we suggest that you book a consultation with a Property Tax expert. They usually only deal with property investors and have more than likely advised hundreds of people whether or not they should invest through a business.
ONLINE PROPERTY TAX ADVISORS IN THE UK
Here’s a list of some of the best property tax advisors that you can reach online to get advice.
We hope you found this post useful and more than anything we hope you gained a little more insight into how buying a property through a limited company works and what the pros and cons are. If you think we have missed anything or you’ve got a question that we haven’t answered or covered in this blog post, then please do get in touch using our contact us page or by leaving us a comment below.
There are lots of other interesting property articles on our blogs page.