There’s been a growing interest from landlords and investors buying properties to rent out through their limited companies rather than their own name. This is due to tax efficiencies on holding investment properties and changes to mortgage interest relief. Purchasing through a company can also offer such advantages as reinvestment opportunities. Having said this, choosing to buy through a limited company comes at a cost, including company running costs, higher mortgage rates, and complex tax implications on profits. Let’s explore how the whole process works, the benefits and the drawbacks.
What does it mean to buy property through a limited company?
When you set up a limited company, you become a Director of this company. However, when you buy a property through your limited company, you do not personally own the property, but your company is the legal owner. For example, if your company is called “Property R Us”, then the title to your property (after purchase is completed) will be registered at the Land Registry in the name of “Property R Us”. All rental income will belong to “Property R Us”, but you (as the investor) will own “Property R Us” itself (by holding shares).
It is important to note that if you have a lender, the charge will have to be registered at Companies House within a strict time frame.
If you purchase with an aid of a mortgage, this will also be in your company’s name, but it is important to note that prior to releasing mortgage funds for the purchase, your lender will require personal guarantees from you as the company director (and any other fellow directors). The company will also be responsible for paying corporation tax (Limited Companies for Landlords – UK Landlord Tax) on rental profits, and any dividends that you take out may be subject to personal tax.
Some investors would set up a special purpose vehicle tax (which is also known as SPV) for this purpose. It is basically a limited company which is opened solely to hold property investments (and for no other purpose or business) . It is interesting to note that mortgage lenders often prefer SPVs as it makes it easier to separate your property portfolio from other trading activities. (Benefits of using a SPV company for buy-to-let property)
Why are investors buying to let through limited companies?
Tax is the main driving force. Individual landlords are heavily taxed on rental income. Add to the mix if the landlord is a higher and additional rate tax payer, this would significantly increase the tax burden. Limited companies, however, can (for example) continue to deduct mortgage interest as a business expense, which reduces taxable profits. Those profits are then subject to corporation tax, which is currently charged at 19%-25% (depending on profit levels) Corporation Tax rates and allowances – GOV.UK, which is more attractive than paying income tax at 40% or 45% on personal rental income. Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK
Company ownership, therefore, offers opportunities for tax efficiency and reinvestment (you can grow your portfolio), but it comes with additional complexity and responsibilities, and every landlord must carefully weigh pros and cons before choosing the route that is more suitable for them and their circumstances and long-term plans.
Legal considerations when buying property through a company
The conveyancing process of buying a property through a limited company is quite similar to that of buying in your personal name. However, some steps need to be carried out prior to purchase. Firstly, you must incorporate your limited company before the purchase goes through. As mentioned in the beginning of this article, your company will be the legal owner of the property, and the property will be registered in your company’s name at HM Land Registry. The Contract, Transfer, Mortgage Deed (if you are buying with a mortgage), and Stamp Duty Land Tax From (or LTT if the property is in Wales) will be signed by the company director(s) rather than in your personal capacity.
If you are having a mortgage, lenders will often require that you take some additional steps, such as personal guarantees from the company directors. This would involve you having to take independent legal advice and sign some additional documents. This would also mean that while your company owns the property, you will be personally liable for any debt should your company default. Your conveyancer will also be required to carry out additional searches/checks and comply with your lender’s additional requirements.
As a director, you will have a great responsibility to ensure that the business is compliant with company laws and all tax/accounts filings are met within the Companies House regulations. Being a director of a limited company comes with greater responsibilities and obligations, rather than purchasing in your own name. There are more administrative responsibilities, regulatory duties, and higher ongoing costs.
What are the disadvantages of using a limited company?
Mortgages – they come with higher interest rates and fees, and there are fewer lenders out there who are prepared to lend to limited companies. This could increase the overall borrowing cost for you, because you are limited in choice. Another disadvantage is you pay tax on dividends. This is often referred to as “double taxation”.
As mentioned earlier in this article, running a company involves administrative responsibilities (such as keeping Companies House records up to date and filing the necessary documents when required). Many investors will, however, hire an accountant to manage this side of things, which also means additional costs. If you are just starting out (rather than having a large property portfolio), these costs and responsibilities may outweigh the benefits.
Careful planning can maximise your investment
Ultimately, using a limited company is not a “one size fits all”. It can offer significant advantages for some investors, but increased complexity, costs, and risk for those who are just starting or have only one or two properties.
With the planning done correctly and by seeking the right professional advice, you will be able to decide the best way forward for your investment.
Whichever route you choose (be it through your company or personal ownership), the conveyancing process needs to be handled with care. At Goughs, our experienced property teams can guide you through every stage, ensuring your transaction runs smoothly and giving you confidence that your investment is in safe hands.
If you are considering investing in commercial property, our residential and commercial teams at Goughs can guide you through every step.
