Thanks to UK tax changes, many property investors have started buying rental properties as a limited company, rather than as an individual.
Let’s take a look at the pros and cons of this strategy and how to get started.
What are the benefits of property investment through a limited company?
Setting up a limited company for your property investments can have significant advantages. Here are some of the main ones.
Corporation tax can be favourable to income tax
When you own rental property in your own name as a private landlord, you’ll pay income tax on the money you make. The rental income is added to any other income you have, and the total sum will determine how much income tax you pay. In some cases, rental income can push you into a new tax threshold, forcing you to pay higher taxes.
If you use a limited company to invest in property, however, you won’t pay income tax on your rental income. Instead, you’ll pay corporation tax which stands at 19% for the year 2021-2022. If you’re in a higher tax bracket, this can work out favourable to paying income tax.
You can deduct certain expenses with the help of a limited company
Private landlords used to have significant tax advantages, such as the ability to deduct mortgage interest from their rental income. However, this is no longer the case for those investing in property as an individual.
By investing in property as a limited company, however, these tax advantages are still applicable. As a limited company, you can class these costs as business expenses.
Transferring company ownership is more straightforward than changing property ownership
If you want to transfer the ownership of your investment property, it can be easier to do this if you purchased it through a limited company than if you purchased it as an individual. By keeping the property under the same company’s ownership, you can also protect the transaction from stamp duty, inheritance tax and capital gains tax.
You can protect yourself from company debts
If you own a limited liability company, then you can’t be held personally liable for company debts. However, one exception to this comes in terms of your mortgage.
Your mortgage lender will still hold you responsible for paying them back.
What are the downsides of property investment through a limited company?
Although there are numerous financial benefits of setting up a limited company for your property investments, buying properties with this strategy comes with downsides too.
Running a limited company comes with added responsibilities
Running a limited company comes with responsibilities that private landlords who invest as individuals don’t face. For example, you’ll have to prepare accounts, pay Corporation Tax, file documents with Companies House, pay legal fees and potentially prepare for annual audits.
No capital gains tax allowance
When an individual sells a buy-to-let property, Capital Gains Tax (CGT) Allowance protects part of the sale from tax. However, since limited companies don’t pay CGT, this allowance isn’t applicable. Instead, limited companies pay Corporation Tax when they take profit out of the business.
Higher mortgage rates and less choice
Most lenders charge limited companies higher interest rates and fees than they charge individuals on buy-to-let mortgages. You may find it more difficult to get a loan in the first place because not all buy-to-let lenders are willing to offer mortgages to limited companies.
How to incorporate your limited company
Setting up a limited company is fairly easy to do, but it may be worth hiring a professional to guide you through the process and help you maximise your profits while minimising admin.
1. Choosing a company name
First, you’ll want to choose a name for your limited company and check that it’s available.
Companies House and the Intellectual Property Office will reject names that are already in use or are too similar to names that have already been registered, so it’s wise to use the WebCheck service before making your decision.
It’s also worth looking at the IPO’s registered trademarks tool.
2. Registering an address
Next, you’ll need to register an address. This can either be your home address or a registered office address. If you don’t have an office, you can use a paid-for service or ask your accountant to provide one. Your company’s registered office details will be publicly available and must be included on all letters, invoices and contracts. People will be able to find the address via the Companies’ House website.
You’ll then need to select at least one company director. Selected directors will be responsible for meeting legal requirements and keeping the annual accounts up-to-date, even though most hire an accountant. An accountant will be able to do most of the admin for you and minimise the risk of mistakes, but as a director you’ll still be held legally responsible.
4. Choosing shareholders
You’ll need to select at least one shareholder. They can also be a director.
A shareholder is someone who owns shares in the company. Usually, this will give them voting rights and influence over how the company is run. They’ll be paid dividends based on the number of shares they hold. Some limited company owners appoint their partner or children as shareholders so they’ll receive a share of the company’s profits.
5. Appointing people with significant control
When registering your company, Companies House will require details about who owns and controls it. You’ll need to appoint a person (or people) of significant control. They must have:
- More than 25% of the shares
- More than 25% of the voting rights
- The right to appoint or remove the majority of the board of directors
6. Memorandum and articles of association
When you register your limited company, a memorandum of association will automatically be created. This is a legal statement and it must be signed by all shareholders agreeing to form the company.
Articles of association are rules which dictate how the company shall be run. It’s up to you whether you use model articles from the government website or write your own.
The government’s templates tend to be sufficient for basic property portfolios, but hiring a specialist to oversee yours before they’re finalised can give you more protection and ensure your documents are personalised.