An increasing number of property investors and private landlords are opting to buy property through a limited company rather than directly. Whether you’re looking to renovate and sell a run-down property, or rent out property to private tenants, using a limited company is worth considering.
It’s not going to be the best choice in every situation, but it can prove advantageous for many investors and landlords, especially where buy-to-let mortgages are concerned. It really depends on your personal tax position and your plans for the property, so it is important to seek specialist advice before making a decision.
Advantages of buying property through a limited company
Purchasing investment or buy-to-let properties using a limited company can offer significant advantages over buying property personally. Most notably, tax efficiency and limited liability protection.
However, there is no clear tax advantage one way or the other in every situation. It depends on various factors, including how you will fund the purchase, how much tax you currently pay as an individual, your plans for the property, and your investment goals over the short or long term.
Generally, buying through a company will be the best choice if you pay higher rates of personal tax, and you intend to own the investment property for a long period. It’s also ideal if you want to share profits with other people or pass on the property in the future.
Let’s take a more detailed look at the potential benefits of buying a property through a limited company:
1. Tax efficiency
If you own a rental property as an individual, you will be liable to Income Tax and National Insurance contributions (NIC) on the profit you make from rental income. Whereas, if you own property through a company, the profit you make will be subject to 19-25% Corporation Tax instead.
This may not make a great deal of difference if you only pay 20% tax as a basic-rate taxpayer. However, if you are a higher-rate or additional-rate taxpayer, your profits will be subject to Income Tax of up to 40% or 45%, respectively. Your personal tax liability will be even higher if you live in Scotland.
Therefore, landlords whose earnings exceed the basic-rate tax band could make substantial tax savings by owning their rental properties through a limited company. Moreover, if you intend to keep company profits in the business rather than extract rental income as a salary or dividends, you may be able to achieve even greater tax savings.
If and when you sell an investment property in the future, a limited company will be more tax-efficient if you are a higher or additional-rate taxpayer. Any profit you make from the sale will be subject to Corporation Tax, whilst as an individual you would be subject to Capital Gains Tax of 24% (but only 18% if you’re a basic-rate taxpayer).
2. Inheritance Tax relief
By owning property through a limited company, the beneficiaries of your estate may be able to claim Business Relief to reduce the amount of Inheritance Tax payable on your portfolio.
Whereas, if you own investment properties as an individual and plan to pass them on as part of your estate, your beneficiaries could end up paying 40% Inheritance Tax on the value of the properties above the £325,000 threshold.
3. Limited liability
When you hold investment properties through a company rather than directly, you will benefit from limited liability for any losses that your property business accrues. This means that, if the company is sued or falls into debt, you won’t be held personally responsible.
However, if you fund the purchase using investment property financing (e.g. a buy-to-let mortgage or a residential property investment loan), the lender will most likely ask you to sign a personal guarantee as the director of the company.
Under such circumstances, you will be liable for the mortgage or loan debt if the company is unable to meet its financial obligations. Bear this in mind if your main reason for buying property through a limited company is to avoid liability and protect your personal assets.
4. Claiming mortgage interest
Under Section 24 of the Finance Act 2015, individual landlords who buy rental properties directly can no longer deduct their mortgage expenses from their rental income. Instead, they receive a tax credit of 20% of the mortgage interest payments.
Sometimes referred to as the ‘Tenant Tax’, this new system is less favourable to higher-rate and additional-rate taxpayers, who previously enjoyed 40% relief on their mortgage payments.
However, Section 24 rules do not apply to companies. When buying property through a limited company, you can claim mortgage interest as a business expense against your profits to reduce your Corporation Tax bill. This could result in significant tax savings, especially if you own multiple mortgaged investment properties.
5. Flexible ownership options
When purchasing property directly, the maximum number of individuals who can share ownership is restricted to four. However, if you buy through a company, any number of people can be indirect owners of the property by holding shares in the company.
This can be particularly beneficial for family ventures or when seeking investment to grow your property business. You will be able to split income from the property between multiple people in whichever proportions work best for your particular situation.
Disadvantages of buying investment property through a limited company
Whilst there are clear benefits for certain individuals, buying property through a limited company does have some potential disadvantages when compared to purchasing directly as an individual:
1. Less favourable mortgage options
Since limited companies have reduced liability, lenders tend to view them as riskier borrowers than individual homeowners. Consequently, fewer lenders are willing to provide mortgages to limited companies. Those who do typically require larger deposits and charge higher interest rates.
As previously mentioned, you may also find that you will be expected to provide a personal guarantee on the mortgage, thus assuming personal liability for the property (just as you would when buying personally).
2. Increased accounting and administration requirements
Running a limited company generally involves additional administration and more complex accounting requirements than operating as an individual landlord or property investor. You will be required to:
- file annual accounts and a confirmation statement with Companies House each year
- prepare a Company Tax Return for HMRC, to work out your Corporation Tax bill
- prepare a Self Assessment tax return for HMRC, to declare any untaxed income you receive from the company, such as dividends or expenses
- operate PAYE if you intend to pay yourself a director’s salary
- issue dividends to supplement your salary income if you want to extract profits from the company in the most tax-efficient way
As an individual, profits from rental income and property sales are yours to use as soon as the money is paid. You don’t have to work out Corporation Tax and then extract personal income as a salary or dividends. You simply report the income through Self Assessment and pay Income Tax and NIC on your profits, so it’s much more straightforward.
Therefore, you need to consider whether buying property through a limited company offers enough tax savings to justify the additional administration, accounting, and reporting requirements.
3. Stamp Duty surcharge
When buying residential property in England or Northern Ireland, limited companies pay an additional 5% on top of the standard rate of Stamp Duty Land Tax (SDLT) on all property purchases above £40,000, including the first. A flat rate of 17% SDLT applies when companies buy residential property for more than £500,000.
In Scotland, you have to pay Land and Buildings Transaction Tax if you purchase property or land above a certain value, with an Additional Dwelling Supplement payable on additional residential properties (dwellings). These charges also apply to non-residential property purchases and leases.
When buying investment property in Wales, companies pay the higher residential rates of Land Transaction Tax on all purchases of £40,000 or more.
4. No Capital Gains Tax allowance
When selling a buy-to-let or investment property, individuals pay Capital Gains Tax (CGT) on profits. However, they can reduce their liability by utilising their annual CGT allowance, which is £3,000 for the 2024/25 tax year.
Companies are not eligible for this allowance because they pay Corporation Tax on any profit made from the sale of property. Depending on the company’s total annual profit, Corporation Tax of 19-25% will be due on the gain when the property is sold.
If you’re a basic-rate taxpayer and the total gains on the property are not enough to send you into a higher tax band, you’ll only pay 18% CGT on the profit. This is less than the lowest rate of Corporation Tax, plus you get the £3,000 allowance.
5. Few benefits for basic-rate taxpayers
If you are a basic-rate taxpayer, there is very little tax benefit to buying and owning an investment property through a company. Therefore, a company is unlikely to be the best choice, unless you are starting a property development business, purchasing multiple investment properties, or intending to pass on the property to someone else in the future.
What’s the best option?
There are clear benefits to buying property through a limited company, but whether or not these apply to you depends on your particular circumstances and long-term goals. Unfortunately, there is no simple answer.
For some individuals, most notably basic-rate taxpayers with only one investment property, direct ownership is usually the best option. However, using a limited company will likely offer considerably more benefits if you’re a higher- or additional-rate taxpayer or you plan to grow your property portfolio.
Each individual case is different, and there are several factors to consider. It is important to obtain expert advice on the tax implications and long-term financial impact of buying investment property before making a decision.
Thanks for reading
Please leave a comment below if you have any questions about this post or would like to speak to us about setting up a company. Explore the Rapid Formations Blog for more limited company guidance and general business advice.
Very useful advice given here.
I really appreciate your service in getting instant answers to my questions .
Thank you very much
Thank you for your high praise, Mackenzie. We’re glad you enjoyed the article.
Kind regards,
The Rapid Formations Team
Hello, would buying a property for my adult child via a limited company protect them from any child maintenance payment requiring the sale of the property as made by the other parent?
Thank you for your kind comment, Fred.
Unfortunately as we are not regulated to provide legal advice, we are unable to provide advice on specific scenarios. We would recommend contacting a solicitor for further assistance.
Please accept our apologies for any inconvenience caused.
Kind regards,
The Rapid Formations Team