I'm a Property Investor: Do I need to set up a Ltd Company?

When dealing with clients who want to become involved in property, here are some typical questions we're often asked...

Q: Does everyone need to set up a Limited (Ltd.) Company to purchase property within?

Q: What if I am only looking to hold the property for a short period of time?

Q: What’s all this about SIC codes?...Its seems a minefield! 

But did you know…setting up a Limited Company for purchasing property is easier than you might think.

Once you know the key facts that are required it opens up a whole new world.

The first point is that you don’t even need to own the property. You can either receive a healthy income or profit without having to buy the property or without even lifting a finger. This is a separate article and if you want to know more just reach out to us here.

So, if owning the property is what you’re after, why not just buy it in your personal name?

Answer: tax reasons.

Since Section 24 came out many investors are moving to using a Ltd. Company as the vehicle to purchase property.

Section 24 removes a landlord’s right to deduct mortgage interest and other finance costs from their rental income. In many cases a higher tax bill may be on its way. By setting up a Ltd. Company with the relevant SIC codes, an investor can now offset these costs.

A SIC code is a numbered code that describes the nature of the business and what industry it trades within. When setting up the Ltd. Company on Companies House you are given the option to choose which SIC code(s) best suit your business.

This is important as when you come to submitting your accounts, as it will be used again. Also, you may want to raise finance against the property and the code provides the bank with the nature of your business activities.

Most banks who consider lending to Ltd Companies will allow up to 4 different SIC codes. These are: 68100, 68209, 68201, 68320. 

The first two are for buying and selling of own real estate and buying and renting property out respectively. These are the most common we see.

If your Ltd Company has been used for other activities, it is better to open up a new one. There are very few banks who will lend against a company with interests outside of these.

There is an argument for purchasing some buy to let properties in your personal name, if for example you are looking to sell one a year. This is because for Capital Gains Tax there is an annual exemption of ￡12,300 (2020/21) which is available to individuals. Ltd. Companies pay Corporation Tax.

You must seek tax advice from your Accountant first though as everyone has different tax positions and rules do change.

A Ltd. Company can be set up for purchasing buy to let property then you can borrow against it from day 1.

In personal names however, a lender may want in excess of 2 years trading history, which isn’t always the case for Ltd Companies.

More and more banks are allowing applications for Ltd Companies so products are becoming more competitive.

The rental ‘stress tests’ are calculated different and for higher rate tax payers are generally more lenient. This means in some cases you are able to take out more equity from the property. Great if you are looking to expand your portfolio.

There has been mixed opinion on the rules surrounding Ltd. Companies and personal name buy to lets, however if you put the tax changes to one side the argument is that it will improve the professionalism within the sector.

Landlords have had to deal with a lot of cost increases in recent years and although a number of them have dropped out of the market, new ones have come through. Right now enquiries are strong and a number of existing landlords are adding to their portfolios. Even if historically they have been in personal names, new ones are tending to be in a Ltd. Company structure.

If this is still a confusing subject, why not reach out to us. With a background in Financial Services and 20 years in property, there are very few scenarios we haven't come across.

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