Buying Property Through a Limited Company: Pros, Cons & Expert Advice
Purchasing property through a limited company has become an increasingly popular option for property investors and landlords.
With potential tax benefits, limited liability, and the ability to build a more flexible property portfolio, this route can be very appealing.
However, it’s not suitable for everyone, and understanding the intricacies is important.
At Kerr & Watson, we specialise in mortgage and protection advice tailored to your unique situation, ensuring you make informed decisions that align with your goals.
Why Buy a House as a Limited Company?
When you buy property through a limited company, the company becomes the legal owner, and you own shares in the company.
This arrangement offers a host of benefits but also comes with some challenges.
Advantages of Buying Property Through a Limited Company
Tax Efficiency
One of the biggest advantages is tax efficiency. If you buy property personally, rental income is taxed as personal income, which can be up to 45% for higher-rate taxpayers (at the time of writing). In contrast, rental income earned through a limited company is subject to Corporation Tax, which is up to 25%, depending on profit levels (at the time of writing).
- Mortgage Interest Deduction: Individuals can no longer deduct full mortgage interest from rental income, but limited companies can treat mortgage interest as a business expense, reducing taxable profit.
- Profit Retention: If you choose to keep profits within the company rather than withdrawing them, you can reinvest more efficiently and pay less tax overall.
You should always talk with a qualified tax adviser when making any decisions that affect your potential tax liability, especially when investing in properties.
Limited Liability
Owning property through a limited company means your personal assets are protected if the property business faces financial difficulties. The company is a separate legal entity, so any debts or liabilities are the company’s responsibility, not yours personally.
Personal Guarantees
Note that lenders may require you to sign a personal guarantee for a mortgage, which could make you personally liable if the company cannot meet its financial obligations. You should always take legal advice in this situation and many lenders would make this advice a condition before they send any funds.
Inheritance Tax Planning
If you plan to pass on your property portfolio to family members, a limited company can offer more flexible inheritance tax planning options. Shares in the company can be distributed to heirs, potentially reducing the amount of Inheritance Tax payable.
You should speak with a tax adviser to explore inheritance tax strategies that suit your needs.
Flexibility in Ownership
Unlike direct ownership, where a property can only be co-owned by up to four people, a limited company can have an unlimited number of shareholders. This makes it easier to share ownership with family members or business partners and structure income distribution in a way that is most tax-efficient. This may make a mortgage application more complex as some lenders need all shareholders to go on the mortgage application.
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Disadvantages of Buying Property Through a Limited Company
Potentially Higher Mortgage Costs
Mortgages for limited companies often come with higher interest rates compared to personal mortgages. Additionally, fewer lenders operate in this space, which can limit your options.
- Larger Deposits Required: You may also need to provide a larger deposit, typically 25% or more, to secure financing. This is not always the case so speak with a qualified mortgage adviser.
- Personal Guarantees: As mentioned earlier, lenders may require these, increasing your personal financial risk.
Administrative Burden
Running a limited company comes with increased administrative responsibilities. You’ll need to:
- File annual accounts with Companies House
- Submit a Corporation Tax return to HMRC
- Manage payroll if you pay yourself a salary
- Keep detailed financial records
These tasks can be time-consuming and may require hiring an accountant, which adds to the cost of running your property business.
Stamp Duty Land Tax (SDLT)
Limited companies pay an additional 5% Stamp Duty surcharge on residential property purchases over £40,000 (at the time of writing).
This surcharge applies even to the first property bought by the company as a first time buyer buy to let, unlike individual purchases, where first-time buyer relief may apply.
Capital Gains Tax (CGT)
When selling property, limited companies don’t benefit from the annual Capital Gains Tax allowance that individuals receive.
Instead, any profit is subject to Corporation Tax. This could be a disadvantage if you plan to sell properties frequently.
How to Buy a House Through a Limited Company
Set Up a Limited Company
If you don’t already have a limited company, you’ll need to set one up.
Many property investors create a Special Purpose Vehicle (SPV), a type of company specifically designed for holding property. An accountant or solicitor can help ensure the company is correctly structured and registered.
The company will often require the correct SIC code to demonstrate the company has been set up to hold property. Your accountant and mortgage adviser can guide you on this.
Find a Suitable Mortgage
Limited company mortgages are different from personal ones, and finding the right lender is crucial. Most high street banks don’t offer these types of loans, so you should work with a specialist broker.
Understand Your Tax Obligations
Make sure you fully understand the tax implications of owning property through a limited company.
You’ll need to pay Corporation Tax on profits and file annual returns. Consulting with a tax advisor is highly recommended to ensure compliance and maximise tax efficiency.
Is Buying a House Through a Limited Company Right for You?
The decision to buy property through a limited company depends on your individual circumstances, long-term investment goals, and tax position.
For higher-rate taxpayers or those planning to build a large property portfolio, the benefits may outweigh the drawbacks.
However, if you’re a basic-rate taxpayer or only plan to invest in one or two properties, the costs and administrative responsibilities may not be worth it.
Every property investor’s situation is different and our mortgage advisors are here to provide personalised guidance and help you make the best choice.
Limited Company Buy-to-Let Case Studies
We have helped landlords purchase and refinance buy-to-let property through limited companies, including applications involving SPVs, portfolio growth and different ownership structures.
The case studies below show real examples of customers we have helped and demonstrate how factors such as rental income, loan-to-value, company structure, portfolio position and lender criteria can affect the mortgage options available.
Conclusion
Buying a house through a limited company can be a smart move for property investors, but it’s not a decision to take lightly.
The potential tax benefits, limited liability, and flexibility must be weighed against the higher mortgage costs and increased administrative work.
At Kerr & Watson, we’re committed to helping you secure the most suitable mortgage for your needs. Get in touch with our expert team for comprehensive mortgage and protection advice.
