The Financial Perks of Buying a Property Under a Limited Company

Property investment has witnessed a rise in the trend of individuals owning homes through limited companies, particularly in the UK. Although traditionally associated with large corporations or affluent investors, an increasing number of regular property buyers are opting to establish limited companies for their property acquisitions. What are the financial advantages of this approach, and what factors should be taken into account before proceeding?

In this blog post, we’ll explore the financial perks of buying a home under a limited company, as well as some important factors to weigh up before making the leap.

Why Buy a Property Through a Limited Company?

Buying a property under a limited company- Moneydextrous

1. Tax Efficiency on Rental Income

One of the biggest financial benefits of purchasing a property through a limited company is the tax efficiency on rental income. If you’re buying the property as an investment and plan to rent it out, owning it through a company can offer significant tax advantages.

In the UK, individuals are required to pay income tax on rental earnings based on their personal income tax bracket, which may reach up to 45% for those with higher incomes. Conversely, if the property is owned through a limited company, the rental income is liable for corporation tax, currently set at a lower rate of 19% (For companies with less than £50,000 in profit) compared to income tax.

This difference can add up to substantial savings, especially if you're receiving a steady stream of rental income. It also means that you could reinvest the profits into other properties or assets more easily without losing a large chunk to taxes.

2. Mortgage Interest Relief

Since 2017, there has been a significant reduction in mortgage interest tax relief for people purchasing investment properties. Previously, landlords were able to subtract all mortgage interest from their rental income prior to tax payment. However, now individual property owners are only eligible for a basic-rate tax credit for mortgage interest, leading to a substantial decrease in the tax benefits associated with owning rental property under a personal name.

However, for properties held in a limited company, full mortgage interest relief is still available. This means that your company can deduct the full amount of mortgage interest as a business expense, reducing your taxable profits. If you’re highly leveraged (i.e., you have a big mortgage), this can make a huge difference to your bottom line.

3. Passing Down Property to Heirs

Owning your property portfolio through a limited company can offer a tax-efficient method for passing on wealth to your children or heirs. In contrast, holding properties personally may result in inheritance tax (IHT) of 40% on values exceeding the IHT threshold.

By owning the property through a limited company, you can potentially reduce the inheritance tax liability. For instance, you could transfer shares in the company to your children over time, which can be a more tax-efficient method than passing the property outright.

4. Dividends and Director’s Salary

Having property ownership under a limited company provides greater flexibility in determining how to receive income. As a director of the company, you have the option to receive a salary, dividends, or a mix of both. Dividends typically face lower taxation compared to regular income, offering a potentially more tax-efficient method for extracting company profits.

This flexibility also allows you to manage your personal tax liabilities more effectively. For example, if your personal income is already near the higher-rate tax threshold, you could opt to take dividends at a lower rate to avoid being pushed into a higher tax bracket.

What to Consider Before Buying a Property Through a Limited Company

While the financial benefits are clear, buying a home through a limited company isn’t always the right move for everyone. There are important factors to consider before you go down this route.

1. Higher Mortgage Rates

One major disadvantage of purchasing a property through a limited company is that the mortgage rates are usually higher compared to those offered to individual buyers. Lenders perceive companies as more risky borrowers, leading them to impose higher interest rates on mortgages acquired by limited companies.

While the tax savings can often outweigh the higher mortgage costs, it’s important to do the math. Compare the total costs of the higher mortgage rate with the potential tax savings to ensure that buying through a company will actually save you money in the long run.

2. Incorporation Costs

Establishing a limited company comes with initial expenses such as incorporation fees, legal fees, and continuous accounting costs. It is necessary to submit yearly financial statements and consider employing an accountant for assistance with the extra paperwork.

Although these costs may not be excessive, they can accumulate over time. It is crucial to consider them in your comprehensive financial strategy to guarantee that the advantages of purchasing through a company surpass the administrative and financial expenses.

3. Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is another consideration. In the UK, limited companies are subject to an additional 3% SDLT surcharge on residential property purchases, regardless of whether it’s your first property. While this is the same surcharge faced by individuals buying second homes, it’s something to keep in mind if you’re looking at properties that could be subject to significant SDLT charges.

For higher-value properties, this surcharge can represent a substantial cost. Again, it’s important to weigh this against the potential long-term tax savings on rental income and capital gains.

4. Capital Gains Tax (CGT)

When you eventually sell the property, capital gains tax (CGT) is something you’ll need to consider. While individuals may benefit from the capital gains tax allowance (currently £3,000 as at 2024), companies don’t have the same CGT-free allowance.

If you plan to hold the property for the long term and pass it down to your heirs, this might not be a significant issue. But if you’re looking to sell and reinvest in other properties, the lack of a CGT-free allowance for companies could eat into your profits.

5. Personal Use of the Property

If you’re buying a property through a limited company with the intention of using it as your main residence or holiday home, be aware that this can complicate things. When a limited company owns a property that’s used personally by the company director, it may be considered a taxable benefit-in-kind (BIK), meaning you could face additional tax liabilities.

It’s essential to consult with a tax advisor to ensure you fully understand the implications if you plan to use the property for personal reasons.

Is It Worth It?

Acquiring a property using a limited company can provide significant financial advantages, especially for individuals aiming to expand a rental portfolio or transfer wealth to future generations. The tax advantages related to rental income and mortgage interest relief can greatly enhance your financial position, while the options for income distribution can offer additional tax savings.

However, this route isn’t without its complexities. Higher mortgage rates, incorporation costs, and SDLT surcharges can add up, and the lack of CGT allowances means you need to be in it for the long haul to fully reap the rewards.

Ultimately, the decision comes down to your personal financial situation and long-term goals. If you’re serious about property investment and willing to take on the administrative and financial challenges of running a limited company, the benefits could outweigh the costs. Just be sure to consult with a financial advisor to ensure you’re making the right decision for your unique circumstances.