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Buying Property in a Limited Company

As changes to legislation and tax create new challenges for landlords, it’s no surprise that many investors are looking for alternative methods of investing. Incorporation – the practice of buying property through a limited company – is on the rise and according to the National Landlords Association (NLA), nearly 38% of landlords considered the process last year alone. 

Limited companies are widely chosen for their flexibility, allowing landlords to potentially claim more tax relief while making it much easier to manage a larger portfolio. That same NLA research showed that 42% of landlords with four or more properties considered incorporation, while that number dropped to 31% for those with under three properties. 

So why choose incorporation? There are pros and cons to buying a property through a limited company and all of them need to be considered before a decision is made. As always, getting advice from an expert on your personal circumstances should always be considered.

Update: Is it the right time to buy through a Ltd Company?

Before considering buying through a limited company, as with any investment, it’s important to look at the external market.

While investing through a limited company does come with unique benefits, it should be noted that the current market will have a huge impact on the success of this type of investment.

The level of uncertainty in the market right now – driven by a second lockdown and with Brexit around the corner – means many mortgage lenders are much more cautious with their products.

This means that while there are still pros and cons, the distinctions are much less clear. As always, whether you invest through a company will be dependent on your personal circumstances.

Should you buy a property through a limited company? 

While this is a question that is largely determined by your goals and the external market, incorporation is almost certainly a good choice for people that are looking to build and scale a property portfolio. 

A limited company can help landlords find value through favourable tax conditions and reduce time management – vital when running larger portfolios or managing property from abroad.

But how do you know if a limited company is right for you? One of the largest indicators is how much you earn in income. If you’re paying the higher rate of income tax, the lower Corporation Tax will most likely be an attractive alternative.

At the same time, your ‘exit plan’ can be a huge reason for investing through a limited company. If you’re looking to sell your properties during retirement then a company will be less effective. If you’re looking to hold on to your portfolio, having a limited company will be ideal.

What are the advantages of buying under a limited company name?

As you’d imagine, incorporation is so popular because there are a number of advantages to buying as a company.

The tax treatment of profits is a major point for investors. Limited companies tend to pay corporation tax on their profits over income tax at a rate of 19%. With individual income tax rates as high as 45% for some investors, in the long-term a limited company structure can be much more efficient.

2020 is also the year that changes to mortgage relief will fully take effect for individuals, which could be driving people to incorporation. In April, the amount of mortgage tax relief for individuals will be limited to the basic rate of tax (20%) and given as a reduction in tax liability rather than a reduction to the actual taxable rental income. For companies holding property, however, mortgage interest payments can still be claimed as an expense.

Limited companies also offer more flexibility to quickly and efficiently scale, making managing income tax for multiple properties and expanding your portfolio much easier.

One of the other main reasons for incorporating is because a company structure can be utilised in inheritance tax planning and risk mitigation. Moving wealth around for relatives is much easier for limited companies and properties can be more easily transferred when they’re part of a company structure. 

Typically, tenants may feel a positive benefit from incorporation. Landlords that have larger portfolios will generally be less inclined to raise the rent to cover costs, which could have a knock-on effect with associated void periods and tenant demand.

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Income Tax vs Corporation Tax on Limited Companies for Properties

A typical reason for incorporating are the benefits that Corporation Tax can offer against Income Tax. Buying an additional property can be more tax-efficient when done through a limited company, although buyers may struggle to find a suitable lender, particularly in terms of sourcing a mortgage.

Many people will choose to buy through a property rather than switch properties to a company as they would still be liable to Capital Gains Tax. This is why planning is so important – if your strategy meshes well with incorporation, it can be beneficial to get in early and buy through the company to maximise your savings.

At this point, setting up a property holding company can help alleviate certain taxes. Investors need to register their limited company and the process may be slightly different depending on the country they’re based in.

At the same time, provided these properties are inside a limited company, properties can be transferred without incurring any capital gains tax liability, family members can receive shares and property ownership can be passed to an individual freely.

Holding companies can also pay out profits as dividends, which may help reduce National Insurance contributions.

Stamp Duty Considerations When Buying Property Through a Limited Company

As of July 2020, the Stamp Duty Land Tax (SDLT) holiday is a welcome opportunity for investors – base rates for buyers purchasing a live-in property worth up to £500,000 have fell to 0%. Of course, this means investors purchasing additional properties will also benefit as the 3% additional rate is now the only SDLT they’ll pay, rather than adding it to the standard base rate. 

Aside from this rare exception, typically there are no significant Stamp Duty Land Tax changes for limited companies buying property – it still rises by 3% in bands and SDLT isn’t paid on amounts under £125,000 – other tax implications of buying through a structured company can typically offset the cost. 

What should be considered is the transferring of property into a limited company structure. This should be planned carefully as moving property into a company can have an implications for both SDLT and Capital Gains Tax per property. Similarly, if you’re constantly moving money in and out of the company, this can have further tax implications that may discourage an investor.

Can a Limited Company Get a Mortgage? 

In the property market there’s a common misconception that Buy-to-Let mortgages are near enough impossible to find for a limited company. What was once fairly exclusive to specialist lenders is now much more mainstream. 

As incorporation has grown in popularity, so has the number of products available to buy. In Q2 2019, according to the Buy-to-Let Mortgage Index, 27 Buy-to-Let lenders were offering around 570 BTL mortgage products for companies, making up 33% of all products.

Transferring Property to a Limited Company

It’s true that at first glance, transferring your property into a limited company seems like the easy choice. There are, however, a number of advantages and disadvantages to transferring properties – not least the potential for a much lower tax bill. 

As we’ve mentioned, the company could be required to pay Stamp Duty and up to 28% Capital Gains Tax (CGT) on the difference between purchase and sale price, potentially wiping out any savings made through the relief schemes people typically incorporate for.

That said, if you currently run your Buy-to-Let portfolio through a partnership, transferring to a limited company structure could reduce the tax burden. If you’re looking to pass your portfolio on to a relative, a company can also be much more beneficial for mitigating inheritance tax, which would usually take a large chunk out of the value.

Unfortunately, incorporation does also mean that all of the assets could be exposed if something happens to the company and when the properties are eventually sold, the money would go into the company. This would experience corporation tax before it’s even withdrawn from the company, at which point additional tax could be paid on that income.

Other cons of buying through a limited company?

Unfortunately, depending on how you structure your company, there can be a higher initial cost for employing supporting professionals. Time management and due diligence is also vital at the start, although the process becomes less time-intensive as your network takes over management duties.

While incorporation can be very useful for investors with a larger property portfolio, it’s a decision that should be made based on your personal circumstances and goals. It’s not right for everyone and investors should speak with an industry expert before pursuing the process. 

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