How to set up a property investment company

If you own or are thinking of owning property as an investment or to rent out to earn rental income, then it is worth considering setting up a property company.

Property companies can be more tax efficient and a more financially savvy way to hold investment property. One of the main benefits of setting up a property investment company, rather than holding property personally is that a company pays corporation tax, rather than income tax on rental income from the property.

In this blog, we’ll look at the advantages and disadvantage of setting up a property investment company and how to set one up.

Advantages of setting up a property investment business

Income tax and Corporation tax advantages

Because limited companies pay corporation tax on property income and the corporation tax rate can be lower than paying income tax (depending on your profits vs your personal income) there can be tax savings when moving property into a limited company.

The rates for corporation tax depend on the level of profits but they currently range from 19% - 25%. Whereas personal income tax rates are currently:

• 20% for basic rate taxpayers.
• 40% for higher rate taxpayers.
• 45% for additional rate taxpayers.

Often directors of a limited company can save personal tax by undertaking tax-efficient ways to pay yourself from the limited company in comparison to the personal tax you pay as a sole trader when properties are owned directly by an individual.

For example, as a limited company owner you can take a combination of salary and dividends, with dividends attracting a lower rate of tax than salary alone. You could also add your spouse as a non-executive director or shareholder to your limited company to gain additional tax benefits and savings on income tax by using their tax-free allowance, lower tax thresholds and by them drawing dividends from the limited company.

If you retain cash reserves in your limited company, these could be later reinvested into additional properties. Additional rental income from these properties could be paid out as dividends to you and your spouse or used to contribute to director pensions.

Ability to offset mortgage interest costs against income

One big change and advantage of owning property in a limited company is around mortgage interest.

Landlords that personally own and rent out properties can no longer directly deduct any mortgage interest from their rental income to reduce their tax bill. Instead, this is done by giving the individual a 20% tax reducer. Because of this change higher rate and additional rate taxpayers miss out on further tax reductions. However, when owning and renting property as a limited company, the mortgage interest is fully deductible, meaning tax is saved.

This remains one of the big incentives to people when considering whether to transfer property into a limited company.

Inheritance tax

Property held within a company gives more options when it comes to planning for inheritance tax.

If you plan to pass your business on to your family in the future, it’s much simpler to transfer a limited company than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.

Limited liability

As a sole trader owning properties personally you will be personally liable for any debt, losses or legal disputes. You will also be personally liable for business loans, and this may impact your own individual credit rating.

Setting up a limited company provides legal separation between individuals and the business. A limited company limits your personal liability as the company is a separate legal entity and the company is responsible for any debts, financial losses or legal disputes. Business finances and personal finances remain separate in a limited company and business assets will be held within the company. Within a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.

Allowable expenses

When owning a property in a limited company you can deduct allowable expenses from rental income. This will reduce the amount of profit and the amount of corporation tax you pay. Find out more about allowable expenses against rental income here.

Cash flow advantages

When running a property business, you can choose if you retain your profits within the company and reinvest them to grow the business and make further property investments. This can help to protect personal cash flow and help you to better manage your property investment company cash flow.

Additional buying and selling flexibility

Owning property via a limited company means you could sell or transfer the property, or part of it, by selling or transferring the company rather than the properties within it. This may save time and may avoid the buyer having to pay Stamp Duty.

Spread risk

With a limited company structure, it is possible to spread and reduce investment risk. For example, if you invest in multiple properties, you could own each property in a separate company. This means that if one property investment fails, your other investments and assets will not be at risk.

Disadvantages of transferring property to a limited company

As with all our advice at dns accountants, we make you aware that there can be disadvantages of property investing via a limited company structure also. The advantages and disadvantages of owning property in a limited company, can be dependent on the number of properties you own, your own personal circumstances and future plans.

However, here are some of the general disadvantages that may occur when owning property into a limited company.

You will not own the properties

Properties owned in a limited company, will not be owned by you as an individual. Instead, you will own shares in the company. This can give rise to complications with mortgages, mortgage interest and mortgage lenders (see below).

Mortgage costs

Finance costs of commercial mortgages and buy-to-let mortgages tend to be more expensive than personal mortgages due to higher rates of interest and arrangement fees than personal mortgages.

Annual Tax on Enveloped Dwellings

Annual Tax on Enveloped Dwellings is usually referred to as ATED is a tax generally applicable to companies (resident and non-resident in the UK) owning UK residential properties. However, not all residential properties fall under ATED, only those whose valuation is greater than £500,000.

Other costs to consider

Property investors running a limited need to be aware that there will be additional costs to consider such as legal fees and accountancy fees for things like accounts preparation, completing Corporation Tax Returns and Confirmation Statements etc. However, depending on your circumstances, we often find that the savings made via a limited company often far outweigh these additional costs.

Record keeping

Operating through a limited company involves more record keeping obligations and administrative work than a sole trader business. Company directors have legal responsibilities and duties and may be fined or banned if they do not carry them out correctly.

Information in the public domain

It is likely with a limited company that there will be more information in the public domain. Limited companies are required to publish information about their activities, their finances and their ownership and this information is publicly available to anyone via Companies House.

Structuring your property portfolio

If you are looking to build a wider property portfolio, then once you have figured out the reasons why, the financing etc, then how you structure your property portfolio is very important. The options open to structuring your property purchase or purchases are:

• Individual
• Partnership
• Limited Company or Special Purpose Vehicle (SPV)
• Trust

If you are only intending to buy one property, you can buy this as an individual in your own name. This will depend on your own finances, tax position etc.

If you are intending to build a property portfolio with several properties, then you can hold the properties in a limited company or have a limited company for each property. A Special Purpose Vehicle or SPV is simply a regular limited company which is used solely for a particular purpose. In the case of property investment, its used to purchase and rent out properties.

If you require finance, then buying in a single limited company can become complex. My advice is to buy each property via a SPV or separate limited company. This gives you more flexibility with each property deal you do.

Download our guide on buying property through a limited company.

Partnerships can be used but are less popular these days, most people purchase in their own name or via limited company.

Setting up a limited company

To set up a limited company, an individual needs to register it with Companies House in the UK. The registration process is called incorporation. An individual can register his / her limited company online or via post. Here are the steps you need to take to set up a limited company in the UK:

Choose which type of limited company to set up

Once you’ve decided to set up a limited company, you have to choose which type you wish to form. The two main choices are:

• Private Limited Companies (Ltd) - which is the most common.
• Public Limited Companies (PLC).

Pick your company name

Like a website address, your company name has to be completely unique. Here at dns accountants, we can assist with the registration and incorporation process on behalf of the business.

Things to complete

• The type of business activities your limited company will carry out by choosing a SIC code (Standard Industrial Classification code) for your business. You can select the most appropriate code from the SIC code list online at Gov.uk on the Companies House website.
• The company’s registered office details. You’ll need a Registered Office Address and to provide a service address. You can use your residential address for both, but you can protect your privacy by using a separate registered office address. Here at dns accountants, we offer a registered office address service.
• Decide on the ownership of your company – A limited company must have at least one shareholder. So, you need to decide how many shareholders and the share structure (i.e. how many shares they will each have and the types of shares. You should also be clear and decide on shareholders decision making powers to avoid future disputes.

Documents needed to form a limited company

To complete the incorporation process, you will need the following documents completed and returned to Companies House:

• Application to register a company (form IN01) and the fee.
• Memorandum of association.
• Articles of association (unless you adopt model articles in their entirety).
• Additional information if your application includes a sensitive word or expression.

Register with Companies House

Completing the registration process with Companies House involves submitting all necessary documents, paying applicable fees, and providing accurate information about your company. This step formalizes your company’s legal existence as a registered entity and enables you to conduct business activities within the legal framework.

How long does it take to register a company?

Companies House will normally take between 3 to 5 business days to officially register a new company after the submission process. The time it takes to register a company depends on how the company is presented to Companies House. There are three levels of service: online, online same day, and paper forms. Online registration typically takes 3 to 5 business days, while the same-day service can take under 1 day. If using paper forms, it may take 1-2 business days due to postage time.

After submission, it usually takes around 1-2 days for a company to be created. Companies House operates between 9 am and 5:30 pm on weekdays, occasionally registering companies outside these hours or even on weekends. If submitted outside working hours, the company will be formed on the next working day.

To ensure a smooth registration process, it is advisable to provide accurate information and complete all necessary paperwork promptly. Seeking assistance from experts can also help streamline the registration process and ensure compliance with all legal requirements.

For more help and advice on starting a limited company, download our Limited Company Guide.

Starting your investment property journey

For those people starting their property investment journey, it’s important to consider why you are looking at investing in property, if now is the best time and how to approach every property investment.

Read our blog ’Starting your investment property journey’ here for more details.

Buying property through a limited company

For more help and advice on buying a property through a limited company, download our guide.

How dns accountants can help

Whether you’re a buy-to-let landlord, individual landlord, corporate landlord, property dealer, estate management, non-resident investor, or a second property owner looking for a property accountant, we have packages and accounting services to suit your every landlord and property need. We provide expert advice from our accountants and tax advisers as part of our accounting services.

If you need any help with company formation service for your property business, dns accountants can assist you in registering your company in the UK seamlessly. Our comprehensive packages include the company formation structure, a business bank account and expert advisors to guide you through the hassle-free process.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.