If you are a contractor, business owner or independent professional operating via a limited company, you may have considered buying a property through your business.
The biggest trend in the property market in recent years is the huge and sudden shift in people buying properties within companies. It used to be the case that only a tiny minority of property investors would buy a house through a limited company, but with changes to mortgage tax relief over the past few years, that number has grown substantially.
The main reason to register a company to buy a property is tax efficiency. If you are a higher-rate taxpayer renting out a property as a private individual, you will pay up to 45% of your rental income in tax. As a limited company, you will only pay corporation tax at 19%.
Put in simple terms, it sounds like a no-brainer. However, as with any big financial decision, it is important to look at your long-term goals as an individual and as a company to work out if registering a company to buy a property — or buying a property through an existing company — is the right move for you.
Looking to Register a Company to Buy a Property? Find Out If You’re Trader or an Investor
If you are buying property to renovate, rent out and then sell on at a profit, you are probably a trader rather than an investor. In this case, you should definitely consider setting up a property company. Otherwise, you will need to pay capital gains tax (CGT) on the profits from each property you sell.
If this isn’t your plan, you are an investor and will need to weigh up all the pros and cons of buying through a limited company or operating as a private individual.
What Does Setting up a Limited Company Involve?
To set up a limited company, you will need to register with Companies House. Your company must have at least one director and at least one shareholder, but these can be the same person.
You will need a name for your company and to decide whether you are the only shareholder or whether you wish to extend share ownership to someone else, such as your partner. You will also need a company address. You can use your own address, or if you have an accountant, you can use their office address. You must register your company as an employer with HMRC, even if you are only paying yourself as a director.
Alternatively, you could register your company with Mint Formations, and let us take all the hassle involved with forming a company off of your shoulders.
Advantages of Buying a Property through a Company
From a purely financial perspective, there are three key advantages of holding property as a company rather than as an individual:
1. Tax Benefits on Profits
If you own a property in your own name, the profits you make from renting it out will be added to your other earnings — your salary, for example — and taxed as income tax. However, if you hold it within a company, the profits will be liable for corporation tax instead. The rate of corporation tax tends to be around half of the higher rate of income tax, which is an enormous saving. You will still be taxed on the dividends if you take profits out of the company, but there’s flexibility here.
2. Tax Benefits on Mortgage Interest
As of April 2020, mortgage interest is no longer an allowable expense for individual property investors, but it will continue to be allowable for companies that hold property. This will mean that, if you are a higher-rate taxpayer and use mortgages to buy property, your tax bill will be higher if you buy properties in your own name. Savings can be made by buying through a limited company.
3. Inheritance Tax Benefit
Buying a house as a limited company could be a way of minimising the inheritance tax paid by your family members. You may be able to do this by making them shareholders in your limited company, but it’s worth seeking further advice on this.
Disadvantages of Buying a Property through a Company
While the tax advantages of setting up a limited company make it sound like a good idea, there are some things you should bear in mind first.
There are costs associated with running a limited company, and it may take up more of your time than managing a property as a private individual. You will be required to prepare detailed accounts, which may involve paying professional fees to accountants and lawyers. You may also struggle to get as favourable a buy-to-let mortgage rate as those available to personal borrowers.
Switching Property to a Company
The transfer of existing properties into a company would be treated as a sale by you to the company, and you would be liable to pay capital gains tax. You might also face a stamp-duty charge for any property over the sum of £125,000. This could make the switch very expensive. It is generally advised to retain existing properties in personal ownership and buy any future properties via a company.
Mint Formations is an expert in company formation. Register your company with us today to take the first step in buying your perfect property.
