Pros and Cons of Purchasing Property Through a Limited Company

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Since the introduction of restrictions to Mortgage Interest Relief for buy-to-let mortgages (Section 24), there has been a huge leap towards investing through a limited company for buy-to-let landlords – but is this always the best way forward for investors?

From April 2020, private landlords are unable to. deduct any mortgage interest as an expense against rental income,  instead, tax relief is given as a 20% tax credit off your tax bill, regardless of your marginal rate of tax. This restriction only applies to personally owned properties and since interest is fully allowable in a limited company and the fact that Corporation Tax rates are comparably low, setting up a limited company has become quite popular. 

However, as well as the many advantages there can also be disadvantages of investing through a limited company, here are just a handful of them as suggested by Calculated Ltd, who specialise in tax advice and planning for property investors.

What is a limited company?

A limited company is a form of business that is separated from its owners and shareholders legally. In the UK this must be incorporated at Companies House so it can confer that it is a legal ‘ separate person’ from the people who own the company.

In the Uk, there are three different types of limited companies. A private company that is limited by shares, a public limited company, and a private company limited by guarantee. 

As by law, a limited company is separate from its directors it means that it:

  • Can enter into contracts under its own name, including the employment of staff 
  • Is liable for its own actions, and can sue and be sued
  • Has the right legally to the money made from sales, including profits 
  • The company is responsible for the payment of debts 

Pros 

  • Mortgage Interest is fully allowable as the restriction doesn’t apply to limited companies. By purchasing through a limited company, the mortgage interest payments can be fully deducted from company profits as an expense.
  • Corporation tax rates are much lower than income tax. Profits are taxed at 19% (current corporation tax rate), regardless of your personal income tax rate which is currently 40% for higher rate taxpayers and 45% for additional rate taxpayers.
  • Easier to pass shares in your property company to the next generation as opposed to gifting the actual investment property.

Cons 

  • Mortgage costs tend to be higher (higher interest rates and arrangement fees), as there are a limited number of mortgage products available and generally more difficult to get a mortgage.
  • Professional fees, e.g. Accountancy and Legal are higher in relation to purchasing and ongoing accountancy and tax filing for the company which is more onerous than preparing personal tax returns if the property is purchased in a personal capacity 
  • If you wish to draw the profits out of the company, there will be additional tax charges if taken as a dividend, above the annual dividend allowance of £2000. Assuming an individual has used all their basic rate tax threshold, the dividend rate will be 32.5% if you are a higher rate taxpayer and 38.1% if you are an additional rate taxpayer. 

It’s imperative to note that purchasing through a limited company may not be for everyone. It is therefore important that you seek professional advice based on your individual circumstances so that you can assess what the pros and cons are for you personally. 

At Calculated Ltd, people can book a 45-minute consultation, where experienced advisors will walk you through everything you need to be aware of and advise if a company structure is right for you.