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Should I invest in UK property through a limited company?

More landlords and property investors than ever now choose to purchase properties through a limited company, but it’s important to weigh up the pros and cons. 

From small-time landlords to big portfolio investors, investing through a limited company is something most in the industry will consider at some stage. It became a particularly popular option with the rollout of the Section 24 amendment to property tax rules, which began in 2017.

For some landlords, tax bills could have increased as a result of the change. Since the rollout was finalised in April 2020, landlords can no longer claim back their financing costs (such as mortgages) when calculating their incomes. Instead, the relief is replaced by a tax credit equivalent at the basic rate of tax (currently 20%).

A study last year showed that in 2020, a total of 41,700 limited companies were set up for buy-to-let businesses. According to research by London estate agency Hamptons, this is an increase of 23% from 2019. The numbers have even more than doubled since 2016, with a rise of 128% since tax changes for landlords were first announced.

Why invest through a limited company?

The major benefit of operating through a corporate structure is that the owner should be able to take advantage of more favourable tax rates. This is particularly important since Section 24 took effect. The tax change affects higher rate tax payers the most, so these are the most likely candidates for looking into a limited company.

For those operating through a corporate structure or limited company, the full interest amount can still be off-set against profits, and these are subject to corporation tax (currently 19%) instead of individual income tax, while a variety of reliefs are also available.

Ruban Selvanayagam of Property Solvers points out some of the other advantages of property investment through a limited company: “When profits are compounded over an extended period within a corporate vehicle, larger amounts of capital can be deployed for future investments than would be the case if the funds were carried forward in one’s own name. Therefore, ‘mini-portfolios’ can be built where an investor can stop buying in one company (SPV) and buy in another. Each will pay down all its debts and/or generate a cash positive surplus to reinvest in properties within new SPVs as the overall business grows and becomes more efficient.

“Family members can be more involved through becoming shareholders and directors, resulting in potential inheritance tax (IHT) and capital gains tax (CGT) benefits.”

“As a company director, investors can also pay money into a personal pension. Here, the amount of profits that the company earns is reduced and therefore the amount of corporation tax owed also decreases. Money in Self-Invested Personal Pensions (SIPPs) can also invest in commercial properties.”

Should all landlords consider it?

Sometimes, smaller landlords such as those with just one property, and those in the lowest income tax bracket, might not benefit as fully from setting up a limited company. Particularly for those who already own the property, this would involve effectively selling it to the company, which could incur stamp duty.

Borrowing for limited company buy-to-lets is also generally more expensive and can be harder to obtain compared to standard buy-to-lets, and the associated costs involved with setting up and running a limited company in the first place must also be considered by any landlord thinking of making the switch.

At BuyAssociation can put you in touch with one of our partners for more advice in limited company structures. You can also browse our available property investment opportunities here, or contact us for more details. 

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