Limited companies and BTL properties

Should I own property through a limited company?

 

It’s one of the most common questions we get asked.

The answer is –  no one structure fits all.

It depends on so many other factors particular to you and your objectives. These objectives could change as circumstances in your life change due children, divorce, illness, tax changes or financial circumstances.

However, let’s have a look at the difference between owning property in a limited company and owning property in your personal name. This will be a good starting point for you to understand the pro’s and con’s of owning property in your personal name or through a limited company.

 

Owning property in your personal name

Here are some of the advantages:-

  • Attractive loan to value mortgages with lower rates of interest compared to mortgages for limited companies.
  • You can draw on the income when you need it.
  • Capital gains tax rates of 18% or 28% and if you had lived in the property at some point then private residence relief may be available. 
  • The number of mortgage lenders was and is still very large and competitive.
  • It is relatively straight forward to report the annual income and expenses to HMRC.

So what are the disadvantages?

  • The main one is that for higher/additional rate taxpayers, relief for mortgage interest is restricted to the basic rate of income tax so tax liabilities will be higher. In some instances of high gearing, the tax can be more than the net profit.
  • Inheritance tax planning is not as easy. In a limited company, it is possible to use alphabet shares. However, many landlords use a mix of selling off the properties in retirement, retaining a small number and gifting money to their children before 7 years of passing away.

 

Owning property through a limited company?

When compared with owning property in your personal name the disadvantages of owning property through a limited company were:-

  • The number of mortgage lenders were few and far between and if you could find one, you would be paying much higher interest rates. This is now changing and more and more lenders are entering the market as they recognise that the change to tax relief on mortgage interest is altering the landscape.
  • If you sold a property and wished to withdraw all the funds, you would end up paying the higher rate of tax if you had other income in the same tax year which used up your lower rate tax bands. When compared with a top rate of capital gains tax of 28%, if the property was held in your personal name, this is a big disadvantage and remains so.
  • The compliance costs of having to prepare and submit statutory accounts is much higher.

Advantages which are still available today:-

  • Corporation tax is 19% (from 1st April 2023 the first £50,000 will be taxed at 19%, the next £200,000 will be taxed at 26.5% and the remainder will be taxed at 25% provided that you only control one company) compared with personal rates of tax starting at 20%, then 40% and a top rate of 45%. By not withdrawing the profits a limited company offers more flexibility. After paying the corporation tax, the retained profits could be used to pay down any loans or used for deposits on further properties.
  • A limited company offers more planning opportunities for inheritance tax planning. See our article on Family Investment Companies.
  • Full tax relief is given for mortgage interest. This is now one of the main reasons why higher rate taxpayers are choosing to use a limited company.

So to answer the questions, should I own property through a limited company?

Speak to us, we’ll help you consider all the relevant factors and make the right choice for you now and for your future plans.

 

DISCLAIMER
© Thandi Nicholls Ltd 2021 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.

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