In the UK, Limited Company Property Purchase has become a growing trend among investors and property owners. However, it also comes with considerations and challenges, such as legal and administrative requirements, financing considerations, and personal tax implications.
Understanding the pros and cons of buying property through a limited company is crucial for those considering this approach. In this article, our tax experts will explore the benefits, considerations, steps, and potential pitfalls of buying property through a limited company in the UK, providing valuable insights for investors and property owners alike.
What Is A Limited Company?
A limited company, as defined by HMRC (Her Majesty’s Revenue and Customs) guidelines, is a legally separate entity that is formed and registered with Companies House in accordance with the Companies Act 2006. It is a type of business structure that is distinct from its owners and shareholders, providing limited liability protection.
This means that the company’s owners or shareholders are not personally liable for the company’s debts or liabilities. Beyond the amount they have invested in the company.
A limited company has its own legal identity. With the ability to own assets, enter into contracts, and conduct business transactions in its own name. It can also sue and be sued in its own right. A limited company is required to have at least one director. Who is responsible for managing the company’s affairs and may have one or more shareholders who own the company’s shares.
From a tax perspective, a limited company is subject to corporation tax on its profits, which is currently set at a flat rate. The company’s profits are considered separate from the personal income of its owners or shareholders.
Additionally, the shareholders of a limited company may receive dividends as a way to extract profits from the company, which are subject to different tax treatment than regular income.
Buying a Property Through a Limited Company Benefits
The following are the benefits of buying property through a limited company in the UK:
Limited liability protection:
Buying property through a limited company offers limited liability protection. The company liability is confined to its assets. Owners/shareholders usually aren’t liable for company debts. Personal assets are secure in financial losses or legal claims.
Limited Company Property Purchase - Tax advantages:
One of the primary reasons why investors choose to form limited companies when buying property in the UK is due to the favorable tax treatment of income within a company.
Individual investors face income tax rates ranging from 20% to 45%, while profits held within a limited company incur Corporation Tax, currently set at a flat rate of 19%, scheduled to increase to 25% from April this year.
Likewise, this significant difference in tax rates means that investors in higher tax brackets can potentially save substantial amounts of money by paying Corporation Tax instead of income tax on their property income.
Moreover, while the savings may not be as substantial for basic rate taxpayers, the lower Corporation Tax rates can offer significant tax advantages for investors in higher income brackets.
Buying Property Through A Limited Company - Inheritance Tax Planning
If your ultimate goal in buying property is to provide an asset for your family members. Forming a limited company may be a practical option to consider. This is because owning property through a limited company can provide opportunities to mitigate inheritance tax through the use of trust structures, shares, and other methods that individual landlords may not have access to.
However, it’s important to seek guidance from a specialist tax advisor to navigate the process. Determine if forming a limited company for property investment aligns with your specific needs and circumstances.
Disadvantages of Limited Company Property Purchase
The following are the disadvantages of buying a property through a limited company in the UK:
Higher Mortgage Fees
It’s important to note that changing the ownership of a property from a limited company may involve changing the existing mortgage, which could result in early repayment fees and additional legal and valuation fees.
Additionally, some lenders may charge higher interest rates and fees for properties owned by limited companies compared to individual buy-to-let landlords.
Therefore, it’s crucial to carefully consider the potential costs and implications of changing ownership structure and to thoroughly review and compare mortgage options and associated fees when buying property through a limited company.
Setting up a limited company before purchasing a buy-to-let property allows you to avoid triggering capital gains tax. However, if you need to sell your second home for repurchase by your limited company. It may result in capital gains tax liability if the property has appreciated in value since its original purchase.
Meanwhile, the current capital gains tax rate for higher-rate taxpayers is 28%. While the rate for basic-rate taxpayers depends on the size of the gain and taxable income. On the other hand, if your limited company sells the property in the future. There would be no capital gains tax to pay and the company would instead be subject to corporation tax on the profit.
Ready to save on property taxes? Discover the advantages of buying property through a limited company in the UK. By booking a consultation with one of our tax advisors. Our expert advisors can guide you through the process and help you unlock potential tax savings. So, what are you waiting for? Book your 15-minute free consultation now!
Frequently Asked Questions
Buying a property through a limited company offers limited liability protection, tax efficiency, and the ability to separate personal and business finances.
Yes, it is possible to buy a property through a limited company. This is known as a corporate property investment.
One of the main tax benefits of buying a property through a limited company is that the company pays corporation tax on its profits rather than income tax. Additionally, the company can claim tax relief on mortgage interest payments, which is not possible for individual buyers.
There are some potential downsides to buying a property through a limited company, including higher set-up and ongoing costs, more complex accounting and reporting requirements, and limited mortgage options. It is important to carefully weigh all the pros and cons before deciding whether to buy a property through a LTD company.