The Implications of Buying Property Using a Limited Company

Understanding the Concept of a Limited Company

Understanding the concept of a limited company is crucial for anyone considering buying property through this legal structure. A limited company separates the business owners (shareholders) from the business itself, making it a distinct legal entity. This distinction has significant implications for liability, tax treatment, and financial obligations, all of which are essential considerations for property investors.

What is a Limited Company?

A limited company is a legal structure that separates business owners (shareholders) from the business. This means the company becomes a separate legal entity, capable of being sued or incurring debts independently of its owners. If the company faces financial issues, the owners are not personally liable, and their personal assets are protected.

Setting Up a Limited Company

To set up a limited company, you need to register with Companies House. The process involves:

• Naming a Director and Shareholder: These can be the same person.
• Providing a Company Name
• Deciding on Shareholders: Whether you'll be the sole shareholder or have partners.
• Providing a Company Address: This can be your home address.
• Registering as an employer with HMRC (This is not mandatory but may be necessary for effective tax planning.)

Advantages of Buying Property Through a Limited Company

Buying property through a limited company offers several benefits, including tax efficiency and reduced risk. Here are some key advantages:

1. Tax Relief: Rental income from properties owned personally is subject to income tax rates of up to 45%. Through a limited company, you pay Corporation Tax on profits, currently at 19%-25%.
2. Inheritance Tax Benefits: Properties owned by a limited company can apply for Business Property Relief (BPR), potentially reducing inheritance tax liability.
3. Reduced Liability: The company, not you personally, owns the property. Therefore, your personal liability is limited to your investment in the company.
4. Claimable Expenses: Expenses related to the property, including mortgage interest, can be claimed as business expenses.

Disadvantages of Buying Property Through a Limited Company

Despite the advantages, there are potential drawbacks to be aware of:

1. Higher Mortgage Rates: Lenders often charge higher interest rates for mortgages taken out by limited companies due to perceived higher risk.
2. Limited Mortgage Availability: Fewer lenders are willing to provide mortgages to limited companies compared to individual buyers.
3. Tax on Withdrawn Profits: You must pay yourself a salary from the company’s profits, which is subject to income tax.
4. Complicated Ownership Transfers: Moving property between personal ownership and a limited company involves costs like Stamp Duty, Capital Gains Tax, and legal fees.
5. No Capital Gains Tax Allowance: Limited companies do not benefit from Capital Gains Tax allowance; they are subject to Corporation Tax on profits.

Frequently Asked Questioned

Is it better to buy property through a limited company? Buying property through a limited company offers benefits such as tax efficiency and limited liability, but involves more administrative work, higher mortgage rates, and fewer mortgage options.

Do you pay stamp duty when buying through a limited company? Yes, Stamp Duty Land Tax (SDLT) applies when buying property through a limited company.

How much deposit do I need to buy a property through a limited company? Lenders typically require a larger deposit for limited company buy-to-let mortgages, usually around 25-40% of the property's value.

Conclusion

Buying property through a limited company can offer substantial benefits, particularly regarding tax efficiency and liability protection. However, weighing these advantages against potential downsides, such as higher mortgage rates and increased administrative complexity is essential. Understanding the full implications of this decision will help you make an informed choice that aligns with your financial goals and investment strategy.