Since 2015 we’ve seen an increasing trend of people buying properties through a limited company and there are certainly some obvious advantages. However, it’s by no means right for everyone, or in every situation, so what do you need to consider before buying through a company? 

Prior to the changes in mortgage interest treatment introduced in the Summer 2015 Budget, there was no real reason for sole traders to choose to purchase a property through a company over purchasing as an individual, as mortgages for companies were less competitive. This all changed in 2015 and purchasing through a company suddenly became a much more attractive option for many. Indeed, around 80% of new applications post-2015 are made by limited companies. In short, if you’re an investor, the ownership structure you choose could net you huge tax savings over the long term.

The first thing you need to ask yourself when deciding whether to purchase as a sole trader or through a company is; are you an investor, or a trader? A trader is someone who makes improvements to properties with the intention of selling them at a profit. By contrast, an investor buys property to collect rent and see an appreciation in the value of the property over time.

If you’re a trader, you would probably benefit from buying through a limited company. Corporation tax will be payable on your profits, but any profits achieved as a private individual would be taxed as income, at a much higher rate if you’re in the upper income bracket.

If you’re an investor, the situation is a little more subjective. Historically, most investors have been set up as sole traders, but that is beginning to change. Here is where you need to weigh up the pros and cons of purchasing through a company and consider your specific situation.

In terms of the pros, there are three main tax implications that could motivate you to take this path:

  1. Profits
  2. Mortgage interest and other finance costs
  3. Inheritance tax

Firstly, let’s look at profits. As a private individual, any profits derived from renting your property will be treated as income and subject to income tax at your marginal rate. For a limited company, profits will be subject to corporation tax. This is typically around half the tax liability, so a huge saving. 

Secondly, mortgage interest and other finance costs is where recent and upcoming changes are beginning to have an effect. Phasing in from April 2017 and fully applicable by April 2020, mortgage interest and other finance costs, such as mortgage arrangement fees, will no longer be an allowable expense for property investors operating as sole traders. However, the same will not apply to companies holding property. Companies will still enjoy full tax relief for any mortgage interest and other finance costs.

Finally, there is also an inheritance tax benefit derived from owning property in a limited company. It’s complicated, but in summary you have more options, gaining access to various trust structures and share types that aren’t available to sole traders.

All this sounds fantastic I know, but as always it’s not ‘cut and dry’. There are some pitfalls and drawbacks to take into consideration too. A more minor consideration (unless you’re incredibly admin-averse!) is that there is more paperwork and accountancy costs associated with being a limited company, compared to being a sole trader. You would want and expect that the benefits of this ownership structure would far outweigh these costs though. 

The first main drawback is mortgage choice and availability. Typically, mortgages for companies are limited, with fewer options to choose from, lower borrowing limits and higher interest rates. By contrast, the choice open to an individual is huge. However, as more investors move to limited company structures due to the advantages discussed above, this is changing and may not be a major drawback for much longer.

Secondly, you won’t get off entirely tax-free. Profits withdrawn as salary or dividends are still taxable. While they’re left in the company to build up (perhaps to buy more properties) you’ll pay only corporation tax; however, if you want to take the money out, perhaps as an income to live off, your salary and dividends will be taxed. This means paying income tax, corporation tax plus dividend tax. This is only really a problem if you’re investing to live off now, rather than to accumulate wealth in the long-term, so your aims as an investor will determine whether this is a pro or a con.

So, should you buy a property through a company, or not? Well, the above points indicate that if you’re a higher rate tax payer and you own mortgaged property, you will most likely have a smaller tax bill if you purchase through a limited company and not in your own name. However, tax planning is ever-complex and other personal and circumstantial factors will inevitably come into play (i.e. the presence, or not, of a lower-earning spouse) and you should think hard about what you want out of your property investment, over what time period and what your exit strategy is.

As with all major decisions relating to property purchase and investment, you should seek the professional advice of a tax adviser or accountant to determine the best approach for your specific circumstances.

 

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