Limited companies offer various benefits and explains why the number of people investing in property through limited companies has increased in recent years.
This article summarises the pros and cons of holding property in a limited company.
*** This article is provided for guidance only and does not constitute legal, financial or tax advice ***
Pros
- Less Tax – Corporation Tax vs. Income Tax
When you invest through a company, you pay Corporation Tax. When you invest in your own name you pay Income Tax. Companies with profits under £50,000 pay a small profits rate of Corporation Tax currently 19%. Income Tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate. For 2023/24 these three rates are 20%, 40% and 45% respectively.
- Tax Relief – Mortgage Interest
The tax changes in April 2020 mean that landlords can no longer deduct mortgage expenses from their rental income (to reduce their tax bill). If you’ve bought a property through a limited company, you can treat mortgage interest as a business expense. So, you receive 100% tax relief against the income.
- Extracting Profits Tax-efficiently
Dividends
UK taxpayers get a ‘Dividend Allowance’ of £500 from 6 April 2024 for individuals who receive dividend income. The allowance is per shareholder, per year and applies to your total dividend income, across all your companies.
For overseas investors, there’s no income tax liability on dividend income.
Owner/Director Loan Repayments
When you invest through a company, you technically lend that company the money for that investment. That means it can pay you back. And repayments on loans don’t count as income – so they’re tax-free.
Pension Contributions
With a limited company, you can extract your profits as pension contributions. And, because these count as a business expense, they’re also deductible from your tax bill. That means, if you extract all your profits as pension contributions, there’ll be no Corporation Tax liability, as your profits will technically be zero.
- Flexible Estate Planning
With a limited company, you can gift shares however you like. Transfer them to your chosen beneficiaries over a period of years, or hand over a 99% stake as soon as you incorporate. So long as your beneficiaries are over 18, it’s entirely up to you. If you do transfer shares to someone else, make sure you remain as the company’s director, and your investment will remain in your control.
- Tax-efficient Inheritance
Passing on your assets through a company can be more tax-efficient for your beneficiaries. Say you want to leave a BTL property that’s held in a company. You can gift 99% of the shares in that company to your beneficiary, while retaining directorship (and control) yourself. And then, when you pass away, your beneficiary will only need to pay Inheritance Tax on 1% of the shares. That means 1% of the tax bill.
- Clarity and Protection when Investing as a Group
When you buy a property with someone else nobody owns a set amount of it by default. You all just own it together. Even if one person puts down 80% of the Deposit, they’re still not legally entitled to 80% of any rental income. If you invest through a limited company it’s easy to split each investors’ shares based on their contribution. Invest 20% of the Deposit? enjoy 20% of the shares (and the rental income). For total clarity on who owns what, from day one.
As a shareholder, you’ll be legally protected under your Shareholder Agreement, a document outlining who invested what (Deposit), and who gets which share of the profit (rental income). So, if there’s ever a dispute with a fellow shareholder, you’ll always have ironclad legal protection.
- Reinvest Profits
If you bought your property through a limited company, your profits can be kept in the company and used to reinvest in other buy to let investments. This helps you avoid further tax payments.
Drawbacks of Property Companies
- The time and the cost of administration, such as accounting and record-keeping, increases on incorporation as company finances face more official scrutiny and hiring an accountant to manage the company accounts costs money.
- Taking money out of the company needs planning. Shareholders can draw a salary, borrow money or take dividends from a company. Still, these payments must dovetail with non-property income, like salaries or pensions, to avoid paying unnecessary taxes.
- Buy-to-let mortgages are generally more expensive and harder to find for a company than an individual borrower.
- Transferring properties in your own name is expensive. If you already own a few buy to let investments, you can’t just simply transfer them into a company. Your company will need to buy them off you! This means you’ll need to pay the usual costs that come with buying and selling property: stamp duty tax, capital gains tax, any early mortgage repayment charges, and legal fees.
If you only own one or two properties, transferring them into a company might not be worth it. But if you have 10 rental properties, it might be a more tax efficient solution. Before deciding, you should always get advice from an expert.
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