April 10, 2024 3:31 pm

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Nikka Sulton

Considering whether to invest in property personally or through a limited company is crucial. This decision affects your financial outcomes and investment objectives. In this guide, we’ll evaluate the pros and cons to assist in determining if a limited company aligns with your needs.


Ltd vs personal: what’s the difference?

For both novice buyers and seasoned landlords, weighing the distinctions between purchasing an investment property individually or via a limited company holds significance. Opting for personal ownership entails personal liability for debts and legal matters, alongside personal income tax and capital gains tax obligations. Conversely, utilizing a limited company establishes a distinct legal entity that shields personal liability, albeit entailing heightened administrative responsibilities and adherence to corporation tax regulations. Prioritizing a thorough assessment of the tax ramifications is crucial to making a well-informed choice.


Examples of tax paid on investment property

The table below outlines the key property taxes that both private and limited company landlords need to know about:

Property investment Stage Tax Personally Owned Limited Company
Buying Stamp Duty Land Tax 3% surcharge 3% surcharge
Selling Capital Gains Tax £0 – £6000 Tax free Gains over £6000 – Basic rate taxpayer: 18% Higher & Additional rate taxpayer: 28% 19-25% (Corporation tax) Based on pre-tax profits
Letting/ generating revenue Income tax £0 – £12,570 Tax free 0% £12,571 – £50,270 Basic rate tax payer: 20% £50,271 – £125,140 Higher rate tax payer: 40% £125,141+ Additional rate tax payer: 45% 19-25% (Corporation tax)
Estate planning Inheritance tax (IHT) 40% above £325,000 7 year taper on gifts Same but on value of shares held


Buying property personally

Opting for personal property investment entails registering the property deeds and mortgage under your individual name. Any profits generated from the buy-to-let property are subject to personal income tax, calculated by deducting allowable expenses from rental income. The resultant sum is then taxed at your applicable standard rate.

The following table shows the Income Tax rates and bands:

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £125,140 40%
Additional rate over £125,140 45%

Under Section 24, landlords no longer have the option to deduct mortgage interest as an expense for personally owned properties, excluding Furnished Holiday Lets (FHL). This change impacts those falling within higher or additional tax brackets, leading to increased tax payments. Consequently, a 20% reduction in tax liability applies to mortgage interest payments and associated financing costs, including mortgage broker fees.


Buying property in a limited company

Opting for property investment through a limited company entails ownership of the company, which in turn owns the properties. The company assumes the responsibility of acquiring buy-to-let properties, managing mortgages, and paying corporation tax on generated profits.

Profit calculation for the company involves deducting allowable expenses from rental income, mirroring the process for other property ownership structures. Notably, within a limited company setup, the entirety of mortgage interest payments is tax-deductible. This deduction reduces the taxable profit and subsequently, the associated tax liability. Should you opt to retain these profits within the company, such as for future property ventures, no further tax obligations would ensue.


Advantages of buying property through a limited company

Purchasing property within a limited company framework presents numerous advantages, particularly advantageous for higher rate taxpayers and those aiming to expand their property investment portfolio. Here are some key benefits:


  1. Enhanced tax efficiency and strategizing

Owning properties through a limited company allows for leveraging lower tax rates, facilitating the retention of a higher proportion of profits. Instead of facing taxation at personal income tax rates, which can prove burdensome for higher rate taxpayers, rental profits from properties held within a limited company are subject to the prevailing corporation tax rate, typically substantially lower. This affords potential tax savings that can bolster long-term profits.


  1. Increased financial versatility

As a director of a limited company, you enjoy heightened flexibility in profit management, whether reinvesting in additional properties, contributing towards your pension, distributing profits through tax-efficient dividends, or allocating a salary to yourself. Additionally, if you’ve extended loans to your company, such as for property deposits, repayment can be made to you tax-free from the company’s available funds.


  1. Portfolio Growth:

Considering expanding your property portfolio? By retaining profits within the company, you can finance future property acquisitions without incurring income tax (until profit withdrawal). This approach offers investment flexibility and accelerates portfolio expansion.


  1. Estate Planning:

Holding property within a limited company offers enhanced options for inheritance tax planning, facilitating smoother business transfer to family members. As the property remains under the company’s ownership, it may also mitigate stamp duty, inheritance tax, and capital gains tax obligations, bolstering investment safeguarding.


Disadvantages of buying property through a limited company

While opting for property ownership through a limited company offers advantages, it might not suit those with one or two rental properties. It’s crucial to weigh potential drawbacks before deciding. Here are key disadvantages:


  1. Capital Gains Tax:

Selling property via a limited company incurs corporation tax on all profits. In contrast, individual property owners benefit from a capital gains tax allowance (£6,000), potentially reducing tax liabilities compared to corporate structures.


  1. Dividends and Double Taxation:

Drawing profits from a limited company typically involves dividends, often more tax-efficient than salaries. However, double taxation may occur. The company pays corporation tax on profits, and shareholders may face additional taxation on dividend income. While a tax-free dividend allowance (£1,000) exists, excess dividends are subject to taxation based on Income Tax bands, necessitating annual Self Assessment tax returns.

Tax is paid on any dividends received over £1,000 at the following rates:

Tax Band Tax rate on dividends over the allowance
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%
  1. Taxation of dividends demands tailored advice due to its complexities. Limited company buy-to-let mortgages often incur higher rates and fees, perceived as riskier. Despite initial costs, tax advantages draw many landlords to this approach for long-term gains.
  2. Additionally, meticulous accounting is crucial for limited companies. From tracking rental income to annual filings, adherence to regulatory requirements is essential and demands time and expertise. Given the intricate tax implications, seeking specialist tax advice before decision-making is prudent.


Making the right choices for your personal investment goals

In conclusion, opting for a limited company structure presents several benefits for property investors seeking portfolio expansion, tax optimization, and asset protection.

While not ideal for individuals with few properties or lower tax brackets, it offers considerable advantages for scaling portfolios and tax savings, particularly for higher rate taxpayers.

Despite misconceptions surrounding the complexities of limited companies, the process can be streamlined with guidance from specialized property accounting firms like Provestor. If considering establishing a limited company for property investments, our seasoned property tax advisors offer personalized guidance to ensure proper setup aligned with your investment objectives.





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