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The pros and cons of buying a property through a limited company

by LLP Finance Reporter
20th Feb 23 5:18 pm

In a recent survey from Paragon Bank suggested that the number of landlords planning to set up limited companies to purchase buy-to-let properties had increased by 50% from the first quarter of 2022 to the second.

That’s the highest number of landlords in the last three years that have said they are thinking of using limited companies.

This trend has increased significantly since 2017, when the Government decided to make changes to the rules on how mortgage interest was taxed

There are advantages and disadvantages to buying property through a limited company; London based estate agents Douglas & Gordon have provided their insights into the pros and cons of doing this.

Advantages Include:

Tax savings

You can save thousands of pounds, which is probably the biggest reason investors form limited companies. The profits from rental income for individual landlords are taxed via income tax, along with other earnings such as salary, shares, or dividends.

The tax percentage depends on earnings and ranges from 20-45%. If you buy property through a limited company, you are subject to corporation tax instead, which is far lower than income tax at 19%.

Mortgage tax relief

The tax changes in April 2020 mean that landlords can no longer deduct mortgage expenses from their rental income (to reduce their tax bill). Every landlord would agree that buy-to-let mortgages aren’t cheap and paying tax and monthly interest payments can easily eat into rental profits

Inheritance tax benefit

If your end goal is to pass your property investments on to family members, buying the properties through a limited company could be a good option, as you would have more opportunities to reduce inheritance tax.

Reinvest savings 

If you bought your property through a limited company, your profits after corporation tax can be kept in the company and used to reinvest in other buy to let investments. This helps you avoid further tax payments.

Disadvantages Include: 

Mortgage availability

There are fewer available mortgages than if you are an individual investor, and they are still subject to the same checks. In the past, companies found it a lot harder to find the right mortgage, and they used to come with lower borrowing limits and even higher monthly costs.

Tax when you take money out

Taking money out of the company isn’t always easy. You need to either receive the money as a salary or take it out as a dividend. You can’t simply draw the cash out and pocket it. So, although there are savings to be had in some areas, you will be spending money in others.

Transferring properties in your own name is expensive

If you already own a few buy to let investments, you can’t just simply transfer them into a company. Your company will need to buy them off you! This means you’ll need to pay the usual costs that come with buying and selling property: stamp duty tax, capital gains tax, any early mortgage repayment charges, and legal fees.

If you only own one or two properties, transferring them into a company name might not be worth it. But if you have 10 rental properties, it might be a more tax efficient solution. Before deciding, you should always get advice from an expert.

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