Is it better to hold property in a limited company?

Is it better to hold property in a limited company?

For property investors, the revised tax treatment of finance costs on residential investment property has made owning real estate through a limited company more appealing. This kind of arrangement allows individuals to benefit from reduced liability, increased protection, and other financial advantages that make it an attractive option for those seeking to maximise their returns.

Holding property through a limited company can be tax efficient for higher-rate taxpayers due to being taxed 40% on rental profits and then only getting 20% tax relief on mortgage interest payments. It can also provide a flexible method of holding a residential property portfolio.

With this setup, you can take full advantage of favourable tax treatments and enjoy better capital appreciation than with traditional investments. Still, it is not a one size fits all solution.

At Spotlight Accounting, we always recommend taking professional advice specifically suited to you that looks at the commercial practicalities such as higher mortgage interest as well as the potential tax savings.

Can I hold my property in a limited company?

A limited company is a separate legal entity (in effect, it has its own birth certificate), so where a landlord has an existing property portfolio, it is not just a case of putting the rental business through the limited company; it has to be transferred properly into the limited company.

This transfer involves legally transferring the property into a limited company, settling the buy-to-let mortgage and taking out a new mortgage on the limited company’s behalf.

As the limited company will be connected, stamp duty will be payable in most cases on the value of the property. A capital gain may also be triggered, and a landlord could have to pay capital gains tax on the transfer.

Where individual property investors work more than 20 hours a week subject to meeting certain criteria, a property portfolio can be transferred into a limited company without incurring stamp duty land tax and capital gains tax.

When buying property, it is much more straightforward. The limited company purchases the rental property in the same way private landlords would purchase a property.

What are the tax rules on limited company property holdings?

Property investors need to consider a number of taxes when holding property in a limited company. These include:

Corporation tax

Rental profits made by the property portfolio are subject to corporation tax at the current corporation tax rate (19% 2022/23). The main tax saving over paying income tax is that under corporation tax rules, mortgage tax relief is given as a cost of the property income rather than as a tax credit, so the same rate of tax is paid on all income and expenses.

Limited companies pay corporation tax 9 months and 1 day after the financial year-end.

Capital gains tax

When a limited company sells a property, this is subject to capital gains tax and is taxed at corporation tax rates.

A limited company is not eligible for the capital gains tax allowance that individuals enjoy through income tax. This means that all capital gains must be paid for at the prevailing rate of corporate taxation rather than benefiting from the personal exemptions of individuals.

Income tax

Any dividends that are taken out of the limited company are part of a landlord’s individual taxable income, and landlords will have to personal tax at the appropriate dividend tax rates.

Dividend taxation is paid through self-assessment, so landlords extracting dividends will still have to complete a personal tax return.

Stamp duty land tax

Limited companies pay the same rates of stamp duty land tax as individuals, with the following exceptions:

  1. The 3% surcharge is automatically applied to any purchases.
  2. There could be a potential 15% higher threshold if the property is not used for rental income or development.

Inheritance tax

Property companies do not have the same inheritance tax relief as companies with non-property income.

The value of the individual’s share of the business will form part of an individual’s estate. This will include the market value of property owned by the company.

What are the advantages of holding a property in a limited company?

Holding property in a limited company offers significant tax breaks for higher-rate taxpayers, primarily due to the relief of mortgage interest and finance costs. This provides a major advantage over traditional investment models, allowing investors to realise more profit over time.

There are advantages to basic rate taxpayers as well, including a more flexible way of holding investments through limited companies than holding property individually.

A landlord can take advantage of significant tax savings by introducing family members, setting up inheritance tax planning strategies, and carefully managing what is extracted from the company to maximise their tax-free allowance and basic rate tax band.

Are there disadvantages to holding a property through a limited company?

The main disadvantage is that interest is often higher for a buy-to-let mortgage in a limited company. Most lenders will also require a personal guarantee, and whilst limited companies do have limited liability, personal guarantees will still have to be settled.

Where there is an existing property portfolio, moving this into a limited company is not straightforward and can involve legal and professional costs.

Limited companies are required to submit accounts annually to Companies House, as well as a corporation tax return. As a result, they often incur higher accountancy fees.

All these disadvantages must be considered when weighing up the tax savings of holding property through a limited company.

In Summary

Limited companies offer a highly tax-efficient and flexible ownership structure for property investors. This enables them to benefit from favourable tax planning opportunities, use it as part of future purchases, and plan for the succession of the business to family members.

However, there are a number of individual variables to consider when considering holding property in a limited company. This includes ensuring that the additional costs of running a limited company do not outweigh the tax saving due to the treatment of mortgage interest and finance costs.

At Spotlight Accounting, we work with our landlord clients to understand what they want to achieve from their property portfolio and can help put a plan and a structure in place to get to this point.

Using services such as our property tax planning service, we can review your existing portfolio and recommend the best way of holding rental property.

We always recommend taking professional advice if you want to hold property through a limited company. So contact Spotlight Accounting today!

Learn more about property and tax today:

Carrie Stokes Chartered Accountant

Carrie Stokes Chartered Accountant

I work with directors of limited companies in Shropshire, Staffordshire and the West Midlands giving them a clear and up to date financial picture of their business that they understand. Looking at the numbers, what they mean and how they can be improved to grow their business.

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