Advantages and Disadvantages
The main reason for buying a residential property through a limited company is tax efficiency. If you are a higher rate 40% or 45% taxpayer (annual gross income above £50K in 2020) renting out a property as an individual you will pay 40% or 45% of your rental net profit in tax. Please find our summaries below:
Advantages of buying through a limited company
Tax rate on net profits
Rather than paying income tax on your profits, at up to 45%, landlords who own rental property through a limited company will pay corporation tax on their profits at the much lower rate of 19% in 2020.
No mortgage interest relief restriction for limited companies
Since 2017 this relief has been gradually reduced, meaning that this financial year landlords will only be able to claim relief at the basic tax rate of 20%.However, any interest paid on a mortgage to purchase property through a limited company is fully tax deductible.
Cheaper Stamp Duty
When a company owns a property and it’s time to sell up, there is an option to sell shares of the property rather than the property itself. This can be advantageous to the buyer, as they only have to pay 0.5% stamp duty on such a transaction. Stamp duty for personally owned properties can be as high as 15%. Since 01 April 2016, there is additional 3% stamp duty surcharge on individuals who purchases second or more properties. If you use a company to buy 6 or more properties, you can take the commercial stamp duty, which is much lower than that of individuals.
Limited Liability
If you run your buy-to-let business as a limited company, it will be legally separate from your personal affairs, meaning that you aren’t personally liable for any losses.
Inheritance tax mitigation
Buying a house as a limited company could be a way of minimising the inheritance tax paid by your family members. You may be able to do this by making them shareholders in your limited company but take advice on this.
Multiple Shareholders
Sharing company profits between multiple shareholders, whether by way of salary or dividends, means that you can take advantage of using multiple individual tax allowances e.g. you and your spouse, or your children (if they are over the age of 16), you can be flexible with this approach.
Reinvest profits in a more tax efficient way
You can retain the company profits and reinvest them without paying more tax. When you own a property in your personal name, you need to pay tax on any profit you receive from that property, even if you are intending on using the profits to reinvest in more property. With a limited company, all of your profits (after corporation tax) can be kept in the company and used to reinvest, if that’s the route you want to go down.
Disadvantages of buying through a limited company
Capital gains tax (CGT)
Compared with individuals who is entitle to annual exemption of £12,300 (2020/21) for CGT, there is no annual exemption for limited companies. Companies would pay corporation tax (19% in 2020) on the profit instead; but for individual, with annual gross income up to £50K, you will be subject 18% CGT rate, for income amount above 50K will be subject to 28% CGT rate.
Higher mortgage fees and smaller number of lenders
Many lenders also charge higher interest rates and fees for limited companies compared to individual buy-to-let landlords. You may also find it more difficult to get a loan than if you are borrowing as a private individual and smaller number of lenders to choose. This is because of your limited liability status – it makes you a more risky prospect. It also means that your interest rate is likely to be higher and your loan to value ratio will be lower, so you may need a bigger deposit.
Costs of running a limited company
Once your company is registered, you will have additional responsibilities, you will need to prepare accounts and submit company tax and corporation tax calculations to HMRC. You may need the services of an accountant to complete these tasks. You may also have additional legal fees to consider.