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Should I buy a rental property through a limited company?

You may have considered purchasing property through your business if you are a business owner, contractor, or independent professional operating through a limited company. In recent years, there has been a major shift toward property buying through limited companies. In most cases, purchasing rental properties through a limited company makes sense for higher-rate taxpayers. It provides full tax relief on mortgage interest and access to reduced tax rates and increased flexibility. Additionally, it establishes a solid professional foundation for your property business, which can be beneficial when it comes to convincing investors and lenders. However, each circumstance is unique, and it's always worthwhile to seek guidance as the UK Government continues to make changes that make the decision slightly more difficult each year.

Should I buy a rental property through a limited company?
In this article we cover:

Key considerations before purchasing property through a limited company

  1. Your Income

    – If you purchase property as a higher or additional rate taxpayer, you will be subject to income tax at a rate of 40-45%. However, if you purchase property through a limited company, you will only be subject to corporation tax at a rate of 19%.
  2. Whether you already own property

    – You should assess if it would be worthwhile to transfer property to your company. This will vary depending on your property portfolio, as the costs associated with transferring each of your properties to your company may outweigh any benefits.
  3. Whether you already own a limited Company

    – If you do not own a limited company already, you should assess whether it would be beneficial to establish one and even take into account the cost of running the company.If you want to rent out only one or two properties, incorporating a limited company may be excessive, and you should get professional guidance from a property tax expert or an accountant on this matter.

Benefits of buying a rental property through a limited company

  1. Tax benefit

    – Tax treatment of profits is a major benefit. Profits from rental income are taxed through income alongside other earnings for private landlords. If, on the other hand, you choose to buy a property through a limited company, the profit you earn will be subject to corporation tax at the current rate of 19 percent. As a result, if you are a higher rate taxpayer, purchasing property through a limited company allows you to make major tax savings.
  2. Income withdrawal on a flexible basis

    – With a limited company, you only pay tax on profits extracted from the company. In comparison, a single trader or partnership gets taxed on all profits earned by the business, regardless of whether the profits are actually withdrawn.
  3. Mortgage relief

    – Additionally, private landlords cannot deduct mortgage interest charges from rental income in order to minimise their tax liability. Rather than that, they receive a tax credit equal to 20% of their mortgage interest payments. This means that higher-rate taxpayers will not receive a full refund of their tax on mortgage payments, as the credit only refunds tax at the basic rate. On the other hand, mortgage interest is classified as a business expense for limited companies, which implies that you can deduct the cost before paying corporation tax if you purchase property through your company.
  4. Tax planning

    – Companies are a better vehicle for tax planning than individuals. There are numerous choices available, such as using a family investment company, forming limited liability partnerships, and extracting tax-free benefits, all of which can help reduce the overall tax liability.
  5. Inheritance tax planning

    – Finally, if you are a landlord planning to pass on your property portfolio to your children or other family members, purchasing property through your limited company would be an excellent approach to avoid hefty inheritance tax by making family members shareholders of your limited company.

    Transferring a business to family members is easier with a company because you can offer them shares and eventually transfer the entire business to them.

  6. Stamp duty

    – Stamp Duty is 0.5 percent on the sale of shares. Thus, selling the company rather than the property may provide you with greater bargaining power when disposing of assets, as the purchaser may save a large amount in SDLT (15 percent in certain cases).
  7. Limited liability (Reduced Risk)

    – Having a company helps to mitigate your personal financial risks. Your financial risk is restricted to the company's assets/liabilities in the event of unforeseen circumstances.
  8. Small Self-Administered Scheme (SSAS) pensions

    – Companies can open SSAS accounts to invest in commercial properties or residential development projects. Income earned in the SSAS account is tax-free (until the pension is withdrawn). Additionally, you receive Corporation Tax relief on payments to SSAS pensions.

Drawbacks of buying a rental property through a Limited Company

  1. The primary disadvantage you may have is finding a suitable lender. The majority of buy-to-let lenders will not lend to limited companies, and if they do, they will frequently need personal guarantees from the company's directors. Additionally, you may discover that such mortgages have higher interest rates.
  2. Unless you incorporated your company prior to purchasing your property, you need to transfer or sell it to your new company. This would trigger capital gains tax, given the value of your property is likely to have increased since you originally purchased it. Stamp duty would also be charged on a property repurchase.
  3. Finally, you would need to pay yourself a salary or dividend in order to access your rental income. These payments are subject to income tax, and rental profits taken as dividends are not considered a business expense.

Call the DNS tax team today to find out whether purchasing a rental property through a limited company is the best strategy for you to follow. Our Property tax professionals are highly experienced in property tax planning, so contact DNS today for the best advice. Kindly call us on 03330886686, or you can also e-mail us at info@dnsaccountants.co.uk.

Also See: Outsourced Bookkeeping and Accounting

This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction.

About the author
Blog Author

Owais Bombaywala
Working closely with individuals and businesses to help grow their business requires a significant amount of experience and industry knowledge. Owais is BA (Hons) Accounting and Finance and Member of ACCA. Besides being a compliance champion, he specialises in Property tax planning. With over 7 years of experience in Accountancy and Tax world, our clients count on us to give them timely and up to date advise to help them make the right move. Owais works closely with some of the DNS’s most valued clients to give them the confidence they need to focus on their business. He is known for his calm nature and proactive approach. At DNS, we proud to be a modern and client centric firm. Our advise doesn’t just look at what’s best for your business moreover our aim is to help you achieve your personal goals. Away from work, he resolve family disputes and provide care and support to elderly people. He is a founding member of Human welfare organisation Hounslow.

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