According to brokers, up to 80% of new mortgage applications are now for limited companies. As of April 2020, mortgage interest will no longer be an allowable expense for property investors as individuals. However, as a limited company, it will remain allowable. Essentially, this means that your tax bill could be higher if you own property in your own name, rather than a company name.
There are many other interesting benefits and intricacies to owning a property through a limited company, these include:
Tax on profits:
If you own a company in your own name and you rent it out, you’ll pay income tax on the earnings as if it were a salaried job. However, as a limited company, those earnings are subject to Corporation Tax – which is around half the rate of income tax (if your income tax is at the higher rate). If taking the dividends from the company, additional tax is payable. To avoid the tax on dividends that you’d pay when you withdraw money from your company account, you can simply allow the profits to build up and later use them to purchase another property through the company.
As mentioned earlier, once the new rules come into effect in April 2020, you’ll be able to claim the entirety of your mortgage interest as expenses – if you bought the property through your limited company. Naturally, you cannot do this if you bought the property as an individual.
If you’re building up a Buy To Let portfolio, being a limited company could be advantageous. You are not required to pay income tax when reinvesting profits into further properties. You will still have to pay Corporation Tax on trading profits (reducing to 18% by 2020) however, this is vastly lower than the higher income tax rate of 40% or additional rate of tax of 45% .
Despite the benefits, there are some things to note if you’re considering investing in property through a limited company…
If you choose to withdraw dividends from your company, you’ll be charged tax on withdrawals over £2000. Therefore, if you need to access the profits made by your property investment, you need to be aware that you’ll have to pay tax. As mentioned before, you can leave the money in the company account and continue to purchase property instead.
Running a limited company has got higher costs e.g. Preparing statutory accounts, Company tax returns, filing with Companies House and many other expenses mean that establishing a company for the sole purposes of buying property may not be immediately profitable.
It’s also worth remembering that many lenders will charge higher interest rates to limited companies. You can claim these as expenses, but be aware that you may get lower rates as an individual. You may also have to be selective when choosing your mortgage provider as not all lenders will lend to limited companies.
The final thing to bear in mind is that transferring a property from an individual to a limited company is almost the same as selling a house. View it as buying the property from yourself and paying all of the tax costs associated with selling or buying a house.
If you are already a limited company or wish to build a property portfolio, it’s worth discussing the tax and expenses advantages with your accountant or financial advisor. In some cases, this could save you a lot of money. In other cases, it may not be the most efficient way to buy.
If in doubt, it’s always best to discuss your individual circumstances with an accountant.