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Categories: limited company | guides | property investment guides
Buying property through a limited company grew in popularity after changes to mortgage interest tax relief rules, introduced by the then chancellor of the exchequer George Osborne in 2017.
In this guide, we will discuss intricacies of buying property (residential or commercial) through a limited company, when you should buy through a limited company and what advantages and disadvantages it entails if you choose this investment route.
If you have any questions regarding buy to let mortgages for limited companies, we are always happy to assist you.
Similarly, you may be looking buying a business premises via limited company and need a commercial mortgage, which we can help with too.
Please be advised our advisors can only offer limited company mortgage advice, we cannot offer tax advice.
This guide is for information purposes only, we hope it is useful to prompt the right questions when talking to a qualified tax professional.
How does it work?
When purchasing property through a limited company, the company becomes the legal owner of the property, rather than an individual.
This means that the property is held within the company, and the company's shareholders own the company, rather than the property itself. As a result, the company becomes responsible for managing and maintaining the property, paying any related taxes, and dealing with any legal issues that may arise.
It is important to note that buying residential rental property (a home for people to live in) through a limited company is not the same as buying a commercial property, which instead describes buying a property that a company will occupy.
These scenarios can be a little confusing, so below simplifies what type of mortgage you need:
- Buying a home to rent to tenants via a limited company = Limited company buy to let mortgage
- Buying a business premises in personal name = Commercial mortgage
- Buying a business premises via a limited company = Limited company commercial mortgage
One key advantage of purchasing property through a limited company is that it can offer tax benefits. For example, if the company's profits from rental income are reinvested in the property, they may be subject to a lower tax rate. Additionally, if the property is sold, it may be possible to retain any profits within the company, rather than being subject to personal capital gains tax.
If you are considering investing through a limited company you may come across the term “Special Purpose Vehicle” or “SPV”; read our guide on this subject, if you are left asking “what is an SPV limited company?”.
When buying property through a limited company, it's important to carefully consider the company structure and ensure that it's set up correctly.
This may involve working with an accountant or solicitor to establish the appropriate type of company, such as a special purpose vehicle (SPV), and ensuring that the company is registered correctly with the appropriate authorities.
It's also important to consider the potential risks and liabilities associated with property ownership, such as tenant disputes, building maintenance, and insurance requirements, and to ensure that the company has the necessary resources and expertise to manage these effectively.
When you should consider using a limited company
Due to changes to mortgage interest tax relief the number of property investors who purchase property through a limited company has grown.
It could be a great opportunity for higher rate tax payers particularly to achieve a more cost effective tax liability. However, each individual must assess their situation thoroughly and make sure of their decision. Seek the advice of a qualified tax professional.
The advantages and disadvantages
It’s vital to weigh up all of the pros and cons, before deciding whether to buy property through a limited company. There are multiple advantages and disadvantages when investing via this method.
The advantages
- If you are higher-rate taxpayer, you might save on your tax bill.
- Mortgage interest is treated as a business expense for limited companies, thus it is possible to deduct the cost of mortgage interest before paying corporation tax.
- You may be able to mitigate inheritance tax via different methods.
Again, ensure you speak to a qualified tax professional for appropriate advice.
How it works for mortgages
Investing in property via a limited company allows you to deduct mortgage interest as an expense for tax purposes, which is not the case for individuals who own property directly.
By deducting mortgage interest as an expense, the taxable profit the company earns is reduced, resulting in lower corporation tax payments. This can be particularly advantageous for property investors who hold multiple properties in a portfolio, as the tax savings can be substantial.
In addition to mortgage interest, other expenses associated with owning and managing a rental property, such as repairs, maintenance, and insurance, can also be deducted as expenses for tax purposes when held within a limited company. This can provide further tax benefits and improve the net returns on the investment.
Reducing risk
You may have found that some online sources say that as a director of a limited company you have no personal financial liability for any borrowing through it, but, this should always be caveated with “except where personal guarantees are required”.
All limited company buy to let mortgage lenders require the directors to give personal guarantees. A small number of commercial mortgage lenders do not require this in certain circumstances, but again most do.
However, given a limited company is a separate legal entity from its directors and shareholders, any legal liabilities associated with the property investment would be the responsibility of the company, not the individuals involved.
The disadvantages
- Increased administrative burden and associated costs
- Reduced access to buy to let mortgage deals
- Higher buy to let mortgage interest rates (commercial mortgage rates are not higher)
Increase in admin and costs
Running a limited company requires compliance with various legal and regulatory requirements, such as maintaining accurate accounting records, filing annual accounts and tax returns, and holding annual general meetings.
These requirements can be time-consuming and may require the assistance of professionals, such as accountants and solicitors, which can increase the costs of investing in property.
Challenges with transferring your own property
The process of transferring a property from your personal name into a limited company equates to a change in legal ownership and as such is classed as a sale.
This means stamp duty is payable by the limited company.
Stamp duty
Stamp duty paid on property bought by a limited company is slightly different from the stamp duty paid by an individual buyer.
On top of the standard rate of stamp duty land tax, limited companies pay an additional 5% surcharge.
This applies for all properties bought, the first property purchase is not exempt as it is when an individual buys their first property.
Help with buying a property through a limited company
If you decide to invest in buy to let property through a limited company, our specialist advisors can help you find a mortgage from over 80 lenders in the marketplace and we will work on your case to get it paid out efficiently and quickly.
Call us to get straight through to an advisor during office hours, or enquire online 24/7 for a call-back.
