5 reasons to invest in property through a limited company

Over the past few years tax has continued to increase for landlords and those who hold property privately in their personal name have been worst affected by those changes.

We’re often asked ‘should I buy a rental property through a company?’ by our clients, the answer is often dependent on individual circumstances.

If you’re considering your ownership structure, are looking at ways to make your property portfolio be more tax-efficient or are just setting out and thinking about how to best set things up, here are 5 reasons to invest in property through a limited company.

  1. Mortgage interest relief

If you buy an investment property as an individual, as of the 2020/21 tax year you will not be able to offset any mortgage interest against your income.

Prior to April 2017, you could deduct all of your mortgage interest – this change has had a significant impact on landlord income for those who own the property privately.

There is the ability to claim a tax credit instead which is based on 20% of your mortgage interest payments.

Ultimately though, the new arrangement is far less generous for higher-rate taxpayers who had previously received sizeable tax relief on mortgage repayments.

By setting up a business and holding property in a limited company a landlord can declare rental income after deducting the mortgage.

  1. Lower tax rates

An individual pays income tax which can be up to 45% for high earners, whereas a limited company pays corporation tax which is 19% of the company’s profit.

Though an investor will have to pay income tax on funds paid to them from the company this arrangement can be far more tax-efficient depending on personal circumstances.

There is also the ability for an investor to be paid dividends.

Tax on dividends is different from that of other income and there is an annual allowance, separate to the personal allowance.

There are also ways to structure ownership in order to mitigate the level of inheritance tax.

The types of shares and trust structures, amongst other arrangements, can be applied to reduce the amount of inheritance tax paid by those inheriting your estate.

  1. Multiple shareholders

Whether paid a salary or dividends, by sharing company profits between multiple shareholders investors can take advantage of several individual tax allowances.

This allows the profits to be distributed amongst several individuals, as many as desired – the profit to each individual can be different in amount and varied in frequency allowing for flexibility.

  1. Cheap stamp duty on shares

It is often the case when properties that are held within company structures are sold it is as shares rather than individual properties.

This can prove advantageous to a buyer as the stamp duty on shares is just 0.5%.

  1. Reinvest company profits

A private landlord who owns the property in their own name will need to pay tax on any profit they receive, even if they are intending to reinvest the profits into purchasing more property.

If you’re planning on reinvesting profits a company structure can be advantageous.

After paying corporation tax, which is much lower than income tax, profits can be kept within the company and reinvested easily.

Though mortgage rates for businesses can be higher, creditors are often more flexible and offer better loans to investors who can demonstrate that they have a strong portfolio of properties held within a limited company.

Furthermore, by holding your portfolio in one company an investor has the ability to clearly see the performance of different assets.

Invest in property

Owning property in a company structure can also be advantageous where there is a requirement for limited liability.

Away from tax purposes, it might also be preferential to hold property in a company for asset protection, estate planning or simply for confidentiality.

These are all very valid reasons to consider investing in property through a limited company, though there are elements of additional workload and associated costs to be wary of.

There is no ‘one size fits all’ solution to structuring ownership of residential property in the UK.

We strongly advise our clients seek professional advice regarding their personal circumstances and investing through a limited company – though we understand the topic we are not qualified to offer tax advice.