Firstly, it is important to look at whether you are a property trader or investor.
Buying a property to make improvements to it in order to add value and sell on for a profit makes you a trader. If this is true then your best option is buying as a limited company.
This is because when you trade properties as a limited company, you pay corporation tax on profits, which as it stands is 20%. If you buy a property to do up and sell on as an individual then your gains would be taxed as income, which can be 40% if you are higher-rate taxpayer.
If you are an individual then you may be able to get the profit treated as a Capital Gain rather than income if you are able to prove that you intended to rent the property out
Should you buy a property to collect rent and watch the value rise over years, then you’re an investor. Most investors historically operate as sole traders, but many now benefit from using a limited company.
Why Might Investors Want to Use a Limited Company?
Financially, there are a number of obvious reasons as to why you might want to hold property as a company rather than yourself:
Tax treatment of profits
If you own a property in your own name, the profits made renting it out are added to your other earnings, and taxed as income tax. However, if you hold it within a company, the profits are liable for Corporation Tax instead.
The rate of Corporation Tax is currently 20% (if profits are below £300,000), meaning your tax liability is halved when compared to if you’re paying income tax at a rate of 40% or higher.
You are still taxed on dividends if you take profits out of the company, but it is flexible – you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave profits to roll up with the company to buy the next property.
Tax treatment of mortgage interest
From April 2020, mortgage interest is no longer an allowable expense for individual property investors – they will instead claim a basic rate allowance. It will, however, continue to be allowable for companies that hold property.
Opportunities to mitigate inheritance tax
There are more options for inheritance tax with property held within a company. You can make use of trust structures, different types of shares, and a wide variety of methods that you wouldn’t usually have access to.
Of course, there are downsides to this as well.
Why Not Invest Through a Limited Company?
Previously a major drawback – mortgages for companies were limited, pricey, and had lower borrowing limits.
There are still less products on offer for limited companies than for individuals, but it is changing fast: more investors are going in this direction, lenders are following to win their business.
You are still required to give a personal guarantee and your own finances will be looked into, so it is essentially a personal mortgage just not in name. So, despite the issues, it’s less of one than before.
Dividend taxation when you take the money out
If you leave your rental profits in the company then there is no issue – you pay corporation tax, then allow the post-tax income to roll up.
However, if you are taking money out, you’ll be taxed on any dividends that you take – meaning you will pay 20% corporation tax initially, then 32.5% on anything leftover, in order to take it out.
Extra cost and hassle
Not a huge deal, but there are higher accountancy costs associated with filing annual company accounts, which means that you have that as an expense to add – plus, a lot of paperwork.
How to decide if using a limited company is right for you
Ultimately, it comes down to these factors when it comes to buying through a limited company:
How Much Income Do You Have?
If you are paying income tax at 40% or higher and don’t have a lower-earning spouse whose name the property income could be put into, then paying 20% Corporation Tax instead of 40%+ income tax is going to be tempting.
You do, however, need to take into consideration that if you are actively acquiring properties, then your portfolio may be generating a paper tax loss instead of a profit. This means that with planning, taxable gains could be delayed until you retire and income falls.
Do You Want the Property Income to Live Off?
If you leave it to roll up in the company you’ll be better off than if you need to take it out to spend.
Do You Use Mortgages?
One argument for using a company for higher-rate taxpayers is the ability to claim the entirety of your mortgage interest as operating expenses.
Who Are You Buying Properties For?
After buying them for yourself to begin with, what do you plan to do with them later? Are you going to keep them, sell them on, or pass them on to family?
Should you choose to pass on your properties then holding them within a company can result in huge Inheritance tax savings.
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