Should I buy my property through a limited company?

Should I buy my property through a limited company?

Since changes in 2022, mortgage interest cannot be counted as a business expense but can, in some instances, offer tax benefits – especially for higher rate taxpayers. Therefore, purchasing property through a limited company is often more financially beneficial.

For higher rate taxpayers, buying property through a limited company can be tax efficient. Corporation tax is 19%, while personal income tax on rental earnings minus expenses can be around 40%. Mortgage tax relief has also been reduced; landlords can only claim mortgage interest at the basic rate.

Remember, every case is different, so the tax and commercial implications, such as the intended size of a landlord’s property portfolio, interest rates on limited company loans and inheritance tax, all need to be considered.

When should you purchase property through a limited company?

As a rule of thumb, landlords that are higher rate taxpayers looking to build or expand their property portfolio and not take income from it should look to purchase property through a limited company.

Individual property investors who are basic rate taxpayers, with one or two properties, often are better remaining private landlords as the additional interest rates and costs of running a limited company far outweigh the tax savings.

When looking to buy property, it is always best to speak to a property tax accountant, such as Spotlight Accounting, to ensure you are making the right decision.

What are the factors to consider?

  1. Type of property being purchased– Are you looking to purchase a residential property or commercial property? If it is a commercial property, then mortgage tax relief has a different tax treatment and is an expense rather than a credit. Also, if you have a pension scheme, this can be used to buy the commercial property.
  2. Your other income– If your taxable income is over £50,270 (2022/23 tax year), you will be a higher rate taxpayer. As an individual landlord, you will pay 40% income tax on your rental income, less expenses, but only get 20% tax relief on mortgage interest payments. Where a property is highly geared (has a large mortgage), this can lead to more tax being paid than profit made.
  3. Mortgage interest rates– Limited company mortgages tend to have a higher interest than private landlords buy to let mortgages. Therefore, the additional cost of borrowing needs to be compared to the tax savings.
  4. Family members– Check to see whether your investment property can be purchased with family members that are basic rate taxpayers. If a limited company is buying the property, you may be able to add family members as shareholders.
  5. Extracting income out of limited companies– If you want to extract income from your limited company, you need to see whether this will fall under a basic rate or a higher rate tax.
  6. Costs of running a limited company– As well as bank charges on most business accounts, you need to allow for any additional accountancy fees involved in running a limited company.

How is a limited company taxed when purchasing property?

Besides stamp duty, there is no tax payable on buying property through a limited company.

Corporation tax

Corporation tax is payable on the rental profits of the property portfolio within the limited company. So the business will only pay corporation tax once the property has been purchased and receives rental income.

Capital gains tax

Capital gains tax is only payable when a limited company sells a property. Unless the company is buying a property that you currently own, there is capital gains tax payable when purchasing the property.

Stamp duty land tax

The rate of stamp duty when purchasing property depends on the purchase price and type of property being purchased. The 3% surcharge on additional residential property is automatically applied to a limited company buying property.

There could also be a potential 15% higher threshold on stamp duty payment if the property is not used for rental income or development.

Income tax

As limited companies pay corporation tax, income tax implications exist when purchasing property through a limited company.

What are the advantages of buying a property through a limited company?

The main advantage is how you can treat mortgage interest payments in a limited company for residential property. Tax relief is given at the same rate for corporation tax, whereas under income tax, the income tax rate could be 60% on your rental profits, but you only receive a tax credit based on 20%.

If planned correctly, there are also inheritance tax benefits, such as making family members shareholders, which can reduce the potential inheritance tax liability. Property business does not benefit from business relief, but there is some planning scope with a property company.

Other tax advantages include planning how to extract value from the property company to minimise tax payable.

What are the disadvantages of buying a property through a limited company?

The main disadvantage is the cost of borrowing, finance, and valuation fees, which are often a lot more expensive when you buy a property through a limited company.

Most lenders will require a personal guarantee for the mortgage, so even though limited companies have limited liability, you will still be personally responsible for the mortgage payments.

There is also a higher cost involved in running a limited company.


What if your limited company has no funds to purchase the property?

Directors can loan money to a limited company to buy a property and pay stamp duty on a purchase if needed.

If the funds to make the purchase are in your personal savings, you can transfer the money to the limited company bank account. Then, when the company has the funds, it can pay you back. You will not pay tax on the loan repayments, as it is not considered income from the company.

Can a limited company inherit property?

A limited company can inherit property; however, this does not impact the value of the chargeable estate. This area of tax will need specialist planning.

Can I live in a property owned by my limited company?

Provision of accommodation is not one of the tax-free benefits, so you would have to pay your limited company a commercial rate of rent to prevent paying income tax.

Most buy-to-let mortgages prevent owners from living in the property, so you must check with your lender.

Can I use my existing limited company to buy property?

If your limited company is a trading company, then in most situations, we recommend setting up a new company to hold your investment property portfolio. Limited companies with property businesses do not enjoy the same corporation tax reliefs as trading businesses.

In summary

Since the changes to buy to let mortgage tax relief for individual property investors, buying property through a limited company can be more tax efficient.

Each property investor should take professional advice when purchasing a rental property through a limited company to ensure it is the proper structure for this purchase and future property investment plan.

In most cases, a basic rate taxpayer with 1-2 properties is better off purchasing properties as an individual. Whereas a higher rate taxpayer can benefit from buying property through a limited company, making the purchase no longer seem like a tax burden.

At Spotlight Accounting, we work with individual and limited company landlords, ensuring that they operate in the most tax-efficient way. We do not look at tax efficiency from a client’s current situation; instead, we look to understand their long-term plans so that we are offering advice for their future property portfolio structure.

If you are a landlord looking to build or expand your property empire, contact us for information and advice on the most tax-efficient way to grow.

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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