Whether or not to invest in a property through your limited company needs careful consideration.

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Certainly you can do this, but whether it is tax efficient is an important question to ask before you do anything, particularly if you are tipping the higher earning bracket.

Main home

You definitely should NOT buy your main home through your company. If you did, you could incur a benefit in kind unless you paid the commercial rent to your company. Secondly, any gain on selling the property would be subject to corporation tax, whereas if it’s a property owned personally, equity from the sale of your home is usually entirely tax exempt.

Are you a trader or an investor?

The first important distinction to draw when making this decision is whether you are a property trader or investor.

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. This is because when trading properties as a limited company you will pay corporation tax on your profits – currently 19%. If you buy a property as an individual, your gains would be taxed as income – which if you’re a higher-rate taxpayer, would be 40%.

As an individual you might be able to get the profit treated as a Capital Gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it.

If you buy a property to collect the rent and watch its value increase over the years, you are an investor. Most investors have historically operated as sole traders, but many will now benefit from using a limited company.

So let’s assume that the property you are intending to buy through your limited company is for rental income. The following table explains the likely tax position:

Personally Through company
Ownership The maximum number of legal owners of land and property is restricted to five. A company may have multiple shareholders.
Mortgage availability Numerous bank and building societies offer competitive rates for individuals. If you apply for commercial finance to buy residential property the mortgage rate may not be as favourable.
Rental income Income tax payable at 20% or 40% depending on your tax bracket. Rent received from the property will be subject to the corporation tax at current rate of 19%.

Shareholders will pay 32.5% income tax dividends assuming they are higher rate tax payers.

Mortgage 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). Companies will be allowed to claim mortgage interest.
Losses There is no sideways loss relief for property losses. Losses may be offset against other property income or carried forward. Locked into the company and cannot be offset against the owner’s other income.

Losses can be offset against total company profits of the current or future years, as long as the rental business continues.

Dividend taxation Not applicable as income tax will be paid on rental income. 20% corporation tax will be paid on the company’s profits.
Capital gains tax Subject to Capital Gains Tax (CGT) at 18% or 28%, after deducting any available annual exemption. Corporation tax is payable at the current rate of 19%.

There are a lot of different factors in play so before you make a decision make sure you weigh up all the pros and cons for both options and speak to your accountant.

Cobia Accounting offers a personal and expert limited company setup service and ongoing accounting support for contractors, sole-traders, startups and small businesses for a fixed monthly rate. To learn more, contact us today.