Should I buy a rental property in my name or as a limited company?

The popular debate continues on, whether individuals should be buying their property through a limited company or through their name. The real answer is: it completely depends on the individual scenario.

Eamon Shahir
Eamon Shahir
Apr 4, 2023

Although it may seem more “trendy” now to buy through a limited company, it may not be the best solution for you. On the other hand, for long term wealth planning it may be advantageous.

Let’s start with understanding why you buy property

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

If you buy a property to make value-adding improvements on it and sell back for a profit, you’re a trader. This is also known flipping. 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 taxed at higher and additional rates will lead to a much higher bill!

Note that as an individual you might be able to get the profit treated as a capital gain rather than income if you can prove that you intended to rent out the property. Or maybe you did rent it before selling!

If you buy a property to collect the rent and watch the property price appreciate over time, you’re an investor. This is where we get into the “maybe” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

Don’t forget that if you sell a personal home it can qualify for Private Residence Relief.

Why might investors want to use a limited company?

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

1. Tax treatment of profits

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your employment) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax. This is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company. But there’s flexibility: you can time your dividend pay-out for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers, or just leave the profits in the company and use them to buy your next property.

2. Tax treatment of mortgage interest

Mortgage interest is no longer an allowable expense for individual property investors. Instead, property investors can only claim 20% of the mortgage cost as an income tax deduction.

But this is still allowable for companies that hold property.

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

3. Opportunities to mitigate inheritance tax

Property held within a company gives more options when it comes to planning for Inheritance Tax. More detail will be released soon in a future article, but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because, of course, there are also downsides…

Why not invest through a limited company?

1. Think of your exit as it is expensive to sell a home

It is important to understand the costs of selling a home through a company. In your own name the profit would be subject to Capital Gains Tax which currently stands at 18% and 28%, depending on your income tax band.

When you sell a property in your company you pay Corporation Tax on your profits. However, the remaining balance sits within the company accounts. To get this to your personal name you then need to pay additional personal taxes (most likely dividends) so therefore your taxes can end up being extortionately high.

2. Dividend taxation when you take the money out

If you're leaving your rental profits in the company, there’s no issue. You pay Corporation Tax, then leave the post-tax income to roll up to perhaps buy more properties.

But if you're taking the money out — for example, to spend on your own living costs — you'll be taxed on the dividends you take. That means you'll be paying Corporation Tax first, then paying dividend tax on what's left in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. Extra cost and hassle

Not a biggie, but 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 otherwise would have been. Taxd is working to address this problem!

This used to be a major drawback as mortgages for companies were limited, expensive, and had lower borrowing limits.

However, the number of products on offer for limited companies now, is almost as equal as personal mortgages. Lenders have adapted in order to win business. Keep in mind though, that you could still find that the interest rates on the mortgages are slightly higher.

4. ATED Charges

This is one to be explained further in a future article. But a quick mention here is a must.

Annual Tax on Enveloped Dwellings (ATED) is essentially an annual charge on more expensive property.

Current guidelines state that the charge applies to companies that own UK residential property valued at more than £500,000.

The annual charge varies based on property value. The current charge for homes of value between £500,000 and £1 million is £3,700 but this can rise all the way to £237,400 for homes with a value over £20 million.

As always, there are some reliefs and exemptions that can bring this charge down so it’s worth seeking advice if you are looking to buy property of high value.

Also read: How To Claim Tax Expenses For Tools And Vehicles If You're A Sole Trader

How to decide if using a limited company is right for you

What you decide to do is going to largely depend on the following factors:

1. How much income you currently make from other sources?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put under, the lure of paying the much lower rate of Corporation Tax is going to be strong.

2. Do you want to live off the property income?

Leaving it rolling up in the company for future purchases, or just until your other sources of income stop — will leave you better off than if you need to take it out to spend.

3. Do you use mortgages?

The ability to claim the entirety of your mortgage interest as operating expenses will be a major argument for using a company for higher rate taxpayers.

4. Who are you buying properties for?

As mentioned earlier you have to think of your exit strategy.

Do you plan to sell the properties off to finance your luxury car collection in your retirement years? Or is your plan to pass your portfolio on to future generations?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

5. What would you do?

I think the best solution is to use a combination of the two.

For my personal situation, I would look to buy properties that generate up to the basic rate limit after expenses through my personal name. If planned correctly this could require less upfront costs to purchase. That’s because if you move personal homes you could make use of lower deposits, Stamp Duty savings, and more. This is vital for those at the earlier stages of their property investment journey. It also gives flexibility that if you ever need an injection of cash you can sell a personal home and not have to pay Corporation Tax and Dividend Tax.

This means that if I decided to scale back my other forms of income, I would have income to make use of the Personal Allowance and 20% tax band, the most efficient form of income.

Then after this I would be building my portfolio through a limited company, minimising drawing any funds from the business and instead holding to reinvest. Don’t forget the initial deposit you put into the company is a director loan, so these can be drawn out “tax free” until you are fully repaid.

However, if you are in the middle of your career and anticipate many years of high earnings you may choose to purchase through a limited company first. There really is no right answer and every individual will have their own most efficient path depending on their individual scenarios.

This does not represent financial advice and I am only showing you what I would do in my personal situation based on all the information above.

Also read: What is Income Tax and when do you start paying it?

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