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The Pros and Cons of Buying Property Through a Limited Company

Investing Through a Limited Company

This guest post was provided by CMME Mortgages. 

More and more individuals are choosing to realise their property investment goals through a limited company. There’s a host of reasons to consider this option with tax savings and risk-averseness at the top of the list. 

As specialist mortgage brokers providing Self-employed mortgages, here at CMME we get asked frequently about buying property through a limited company, the pros and cons, and options for funding this investment avenue. We’ve teamed up with SevenCapital to provide you the answers you’ve been looking for.

What’s in the article?

        Why you should consider buying a property through a limited company

        Why do people use a limited company for property investment?

        What options do you have?

        Transferring property to a limited company?

Why should you consider buying a property through a limited company?

Before we dive into the property element, let’s go back to basics.

The government outlines a Limited Company as being: A company ‘limited by shares’ or ‘limited by guarantee’.

Limited by shares

For companies that are limited by shares the distinction is that they are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee

Companies limited by guarantee are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount’
  • invests profits it makes back into the company

According to 2020 House of Commons Business statistics there were six million small/medium enterprises (SMEs) operating in the UK. Of those, approximately two million were limited companies.

Why do people use a limited company for property investment?

There are many reasons why people use a limited company to facilitate their buy to let property investment goals. One of the main and most incentivising reasons is tax. Though as a mortgage broker we can’t advise on matters regarding tax,  we can outline the different reasons this might appeal; a limited company has a corporation tax rate of 19% in comparison to the 40% income tax rate for high-rate taxpayers. It is also much lower than the 45% income tax rate for additional rate taxpayers.

The other significant reason for UK landlords to consider use of a limited company is to minimise risk. As a sole proprietor your personal assets could be at risk if legal action were taken against you for any reason and you may have to personally pay out large sums of money to the claimant. A limited company when prosecuted does run the risk of its assets being taken away, however, you as a shareholder of the company can relax in the knowledge that your personal assets won’t be at risk. 

What options do you have? 

When it comes to owning a buy-to-let property, there are two ways to invest – in your personal name or via a limited company.

Prior to April 2017, landlords who also owned homes in their name could deduct their mortgage interest from their rental income before paying income tax. This meant that the income landlords had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many landlords within a lower income tax bracket.

However, this gradually changed with the amount that can be written off dropping by 25% each year. Now, all rental income will be eligible for income tax, with tax relief being gradually reduced until only basic rate relief (20%) is available.

This doesn’t apply, however, if the buy-to-let property in question is owned through a limited company, as the property is then viewed as a business and all expenses can be written off.

The tax implications are complicated depending on whether and how you earn any other income. Everyone’s personal tax liability will be different and so it’s worth getting independent tax advice.

Getting a mortgage through your limited company

If you operate as a limited company, your income will probably consist of a salary and dividends. Lenders will need to consider both as your income for your mortgage application. In some instances, though there is no guarantee, lenders may be able to use your operating or net profit in addition to your salary.

When bought through a limited company, a landlord can still take an income from their rental property, in the form of dividends. They will only pay tax on the amount of dividends they take, theoretically cutting their tax bills significantly.

Of course, there can also be a number of potential downsides to investing in property via your limited company and it’s important that you are aware of them, as well as the potential benefits.

For example, mortgage costs can often be higher on limited company buy-to-let mortgages and the costs involved in holding buy-to-let properties are different depending on whether it’s done through an individual or a limited company.

Investing through a limited company structure incurs two major tax bills – capital gains tax and stamp duty, which can negate any benefits from tax relief, particularly for landlords with just a small number of properties.

All of these factors must be weighed up in order to determine which is the best set up for you and your property investment.

Transferring property to a limited company?

If you transfer property to a limited company, you will be required to refinance your buy to let mortgages. It is, therefore, a long process and one that needs to be managed very carefully. Please do take care. Mortgage interest rates are typically higher in a limited company than if you own rental properties in your own name.

Whether you want to talk specifics about limited company mortgages or are just after some general advice, CMME can help, you can reach us on 01489 223 750 for a completely free, no-obligation mortgage consultation.

This guest post was provided by CMME Mortgages. The opinions expressed by the guest writer above and those providing comments are theirs alone, and do not necessarily reflect the opinions of SevenCapital or any employee thereof. SevenCapital is not responsible for the accuracy of any of the information supplied by the guest writer.

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