Should You Use A Limited Company For Investment Property Purchases?

Posted by Emma Robison on Sep 12, 2019 5:26:10 PM
Emma Robison
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Should You Use A Limited Company for Investment Property Purchases

Property investment has long been popular with those looking for long-term financial benefits as although, as with all investment types, there are risks involved, it's seen as one of the more stable markets. Recently, however, more and more investors have opted to set up limited companies and purchase properties through these firms. What are the benefits of this option and is it the right solution for you?

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Limited Companies For Property Investment – Why Use Them?

The reason why so many people are opting to build their property portfolios via limited companies can be summarised in one word: tax. In 2015, the UK government announced that changes to the tax laws relating to buy-to-let properties would be phased in by 2020. Individuals who owned rental properties would no longer be able to deduct their mortgage interest and associated costs from their profits before tax. Instead, they would be able to claim a basic rate deduction (currently 20 percent of their mortgage interest costs) from the tax they owed.

While in practice this results in greater profits for many investors, it also means some taxpayers find themselves in a higher tax band as a result – and higher-rate taxpayers could also end up paying more tax than they did under the previous system.

If you purchase investment property through a limited company, however, the old rules still apply. What's more, unless you take them out of your company, your profits are subject to Corporation Tax, rather than personal income tax, which can be less costly. Taking this route also means you can consider a number of additional inheritance tax planning solutions.


The Potential Issues Involved

There are, however, some drawbacks to purchasing investment properties through a limited company. Firstly, if you already have a property portfolio, you can't simply transfer your existing investment properties from your personal ownership to a new limited company. Instead, you'll need to sell them to the company, meaning that you may be required to pay Capital Gains Tax, early mortgage redemption charges and remortgaging costs, and Stamp Duty Land Tax.

Secondly, if you decide to take out dividends, you'll be double-taxed. That's because you'll be required to pay dividend tax in addition to the Corporation Tax that you'll pay on your company's profits.

Additionally, you may find it more difficult to find competitively priced mortgages for your investment properties. Conventional lenders tend to offer fewer mortgages for companies than for individuals and often charge higher fees. However, specialist brokers, such as Business Finance Solutions (UK) Ltd, have access to an array of alternative providers and can find appropriate financing solutions for your needs.

There are also other factors that you need to take into account before deciding whether to buy investment properties through a limited company. It's vital to research the matter thoroughly and take professional legal and financial advice, particularly in relation to the tax implications of the different options available. Simply get in touch with us to learn how we can help.

Image source: Pixabay

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