Is It Worth Buying Property Through a Limited Company?

With property investment becoming a popular route for securing financial stability and building wealth, many investors in the UK are exploring different ways to maximise their returns. One strategy that has gained considerable traction in recent years is buying property through a limited company. But is this route truly the most efficient and beneficial for you as an investor?

There are several significant advantages and potential downsides to consider before making such a decision. While tax efficiency and risk reduction are major perks, higher administrative costs and complicated tax rules can make it a more challenging option.

So, is buying property through a limited company the best path for your property journey? Let’s dive deep into the pros and cons, to help you make an informed choice that suits your long-term financial goals.

Advantages of Buying Property Through a Limited Company

Tax Efficiency: Lower Rates and Deductions

One of the most appealing advantages of purchasing property through a limited company is the potential tax benefits. In the UK, individuals who own buy-to-let properties must pay income tax on their rental income. This can reach up to 45% for those in the higher tax brackets. However, limited companies pay corporation tax, which is typically lower – around 19% as of 2024. This can lead to significant tax savings, especially for higher-rate taxpayers.

Additionally, limited companies can deduct 100% of their mortgage interest from their taxable profits. In contrast, individual landlords can only claim a basic rate tax credit on mortgage interest, which can significantly reduce their profit margin .

Limited Liability and Risk Reduction

Another key advantage of using a limited company for property investment is limited liability. When you own property personally, your personal assets could be at risk if you run into financial trouble. However, when a limited company owns the property, your personal finances are shielded from any potential liabilities the company might face.

This separation between personal and business assets offers peace of mind, knowing that in the event of something going wrong with your investment, your personal savings, home, and other assets will remain protected. Limited liability is crucial in today’s unpredictable property market. It shields investors from personal financial risk, providing much-needed peace of mind in case things go wrong.”

Inheritance Tax Relief and Wealth Planning

For those looking to plan their estate and reduce inheritance tax (IHT) liabilities, buying property through a limited company can offer significant advantages. Transferring shares of a company to heirs can be more tax-efficient than transferring the property itself. As long as the property is held within the limited company structure, the transfer of shares to beneficiaries can result in lower IHT compared to directly bequeathing the property, which is subject to 40% inheritance tax.

This is particularly useful for investors who are thinking long-term and want to ensure that their properties can be passed on to future generations with minimal tax consequences .

Enhanced Mortgage Interest Deductions

Since the tax laws changed in April 2020, individual landlords have found it harder to claim full mortgage interest deductions. But limited companies have retained the ability to deduct mortgage interest as a business expense. For property investors with substantial mortgage debts, this can be a huge advantage.

This benefit directly translates into higher profitability for your rental business, as mortgage interest often represents one of the biggest costs for property investors .

Disadvantages of Buying Property Through a Limited Company

While there are plenty of appealing advantages to buying property through a limited company, it’s not a one-size-fits-all solution. There are important drawbacks that should be carefully considered before making any decisions.

Higher Costs and Administrative Burden

Setting up and maintaining a limited company comes with higher costs compared to owning property personally. You’ll need to deal with the legal fees of forming the company, ongoing accountancy fees, and potentially higher mortgage arrangement fees. You must also comply with legal obligations such as filing annual returns, producing detailed accounts, and paying corporation tax, which requires proper bookkeeping and administrative work.

This can be a time-consuming and expensive process, particularly for smaller investors who might find the administrative burden outweighs the tax benefits .

Capital Gains Tax and Dividend Tax

When it comes to selling a property owned by a limited company, capital gains tax (CGT) can present a challenge. Limited companies must pay CGT on any profits from property sales, and while the corporation tax rate is lower than personal income tax, individual shareholders will then face tax on dividends when they withdraw profits from the company. This effectively creates a two-tier tax system, where you pay tax at the corporate level and again at the personal level when you extract your earnings.

For example, while corporation tax on a property sale might be 19%, if you take the profits out as a dividend, you’ll then be liable for up to 38.1% in dividend tax. This could significantly reduce the overall profit you make from your investment .

Restrictions on Mortgage Availability

Another potential downside is the difficulty in securing competitive mortgage deals. While there are mortgage lenders who specialise in offering loans to limited companies, these mortgages are often more expensive. You may face higher interest rates and a smaller pool of available lenders. Additionally, mortgage arrangement fees can be steeper, and some lenders may require personal guarantees from directors of the company, undermining the benefit of limited liability.

For smaller or first-time property investors, this could add an additional layer of complexity and make it harder to secure financing at attractive rates .

Is it the Right Move for You?

Deciding whether to buy property through a limited company depends largely on your financial situation, investment goals, and long-term plans. If you’re a higher-rate taxpayer with plans to grow a substantial portfolio, the tax savings and potential inheritance tax benefits may outweigh the administrative and financial burdens. However, for smaller investors or those looking for short-term gains, the added costs and complexities may not justify the benefits.

Before making any decisions, it’s wise to consult with an accountant or financial advisor who specialises in property investment to explore your options in detail. Buying through a limited company is a strategic decision, and like all strategies, it requires careful planning and consideration.

While there are clear benefits such as tax efficiency, limited liability, and potential inheritance planning advantages, the costs, complexity, and potential tax burdens on withdrawals should not be overlooked. Think carefully about what works best for your situation and future plans.

In the end, whether you go down the limited company route or stick to traditional personal ownership depends on your unique goals as a property investor. Make sure you’re armed with all the facts before making your choice!