Pros & Cons: Buying Property Through a Company

Published: 18/11/2019

It's something every property investor should consider carefully and is a growing trend. Get your ownership structure right and you'll save a small fortune in tax. Ralph Wyrley-Birch, Senior Partner at Mount & Minster, explains more...

The first thing you need to ask yourself is:

Are you a trader or an investor?

What's the difference? Easy... If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company. Why? Because when trading properties as a limited company you will pay corporation tax on your profits. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be more.

If you buy a property to collect the rent and watch the value creep up in the long term, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders. However, many will now benefit from using a limited company.

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. Tax on Profits

If one owns a property in one's own name, the profits from renting it out will be added to other earnings (such as from your regular job) and taxed as income tax. If you hold it within a company, however, the profits will be liable for Corporation Tax instead, which tends to be around half of the higher rate of income tax – essentially an enormous saving for some.

As with any company, you will still be taxed on the dividends if you take profits out of said company, however there is flexibility: one can time one's dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to acquire the next property.

2. Tax on Interest

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.

If you pay tax at the higher rate and you use mortgages to acquire property, your tax bill will be higher if you own property in your own name rather than in a company.

3. Tax on Inhertiance

Property held within a company gives more options when it comes to planning for Inheritance Tax. One can make use of trust structures, different types of shares, etc to ensure that your beneficiaries go away with more in their pockets in the long-term.

It's not all positive however. There are similarly three disadvantages to acquiring property through a company:

1. Mortgage Availability

This used to be a bit of a problem. Mortgages for companies were limited, expensive and had lower borrowing limits. Although the number of products on offer for limited companies is still much lower than for private individuals, this is changing. As more and more investors are moving in the direction of acquiring property through a company, lenders are following with a wider range of affordable products in order to win their business.

You will still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a dealbreaker than it once was.

2. Dividend Taxation

If one leaves one's rental profits in the company, it's simple: one pays corporation tax, then leaves the post-tax income to roll up, perhaps to acquire more properties and build-up one's portfolio.

However, if you are taking the money out (to spend on your own living costs, for example), you will be taxed on the dividends you take. That means you will be paying corporation tax first, then paying dividend tax on what's left.

So if you are planning on living off your property income rather than leaving it to accumulate, it will be a bit of a toss-up. You will save tax in some ways, but incur extra tax in others. We advise, as with all tax enquiries, to consult with your accountant to work out which will work out best for you.

3. Extra Cost & Hassle

A very small point in the grand scheme of things, there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

As always, individual circumstances for investors warrant bespoke advice. While Mount & Minster are able to provide basic advice in relation to your real estate investments and management of these properties, detailed advice should always be sought from your accountant on such matters. 

If you are a landlord and you wish to discuss our services in more detail, please contact us on 01522 716204.