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Setting Up A Limited Company for Property UK – A Complete Guide

Published by Susan Basnet
Posted Date: June 27, 2024 , Modified Date: July 2, 2024

The term "limited," as in "limited success," often brings up negative thoughts. But does this apply to a limited company? The answer is no. A limited company is a separate legal entity, distinct from its owners, offering them added protection if things go wrong. However, setting up a limited company also has its own set of drawbacks. It's important to consider both the benefits and disadvantages when deciding if forming a limited company is the right choice for you.

Benefits of Setting up a Limited Company 

With a foundational understanding of what a limited company means and why they have grown in popularity, we can now explore the specific advantages that limited companies enjoy—benefits that are not typically available to individual business owners. These benefits can significantly impact the financial and operational aspects of running a business, making the choice of incorporating as a limited company an attractive option for many business owners, especially those in the property rental businesses.

Corporation Tax

Individual taxpayers pay taxes on their income at the personal tax rates, ranging from 20% to 45%. However, limited companies pay corporation tax that ranges from 19% to 25% depending on the total taxable profits of the company, with a profit between £50,000 and £250,000.

Band

Taxable Total Profit

Tax Rate

Small Profit Rate

up to £50,000

19%

Main Rate

Above £250,000

25%

In addition to the lower rates, companies benefit from marginal relief. Marginal relief ensures a gradual increase in the corporation tax rate for profits between £50,000 and £250,000. Mathematically, it is calculated as follows:

Marginal Relief = (3/200)*(U-A)*(N/A)

Where,

U – Upper profit limit

A – Augmented profits, i.e. total taxable profit + any exempt distributions received by the company

N – Company’s total taxable profit

Following is an example of the computation of corporation tax for Gurkha House Ltd, a company with a total taxable profit of £150,000.

Taxable Total Profit

Corporation Tax

150,000 @25%

£37,500

Less: Marginal Relief

 [3/200*(250000-150,000) * (150,000/150,000)]

(1,500)

Corporation Tax

£36,000

It must be noted that Marginal Relief is not available to certain entities, including:

  • Non-UK resident company
  • Close Investment Holding Company
  • Companies with profits over £250,000

Mortgage Interest Deduction

Another huge benefit to companies is the ability of the mortgage interest to be deducted in full. For the individuals operating property letting businesses as a sole trader or in a partnership, the deduction is not given. Instead, a basic rate relief i.e. 20% of the finance cost is allowed to be deducted. However, companies continue to enjoy the benefit of mortgage interest deduction, adding to the benefit of limited companies.

Capital Allowance

Capital Allowance is a significant tax reducer for businesses in the UK. It functions similarly to 'depreciating' an asset, but with the added benefit of being tax-deductible. Companies can claim various types of capital allowances for plant and machinery used in their operations. 

Setting Up A Limited Company capital Allowance

Typically, property letting businesses cannot claim capital allowances and are instead offered other reliefs, such as the Replacement of Domestic Assets Relief. However, these restrictions do not apply to companies, allowing them to benefit from substantial tax reductions.

Factors to Consider Before Establishing a Limited Company

As with most positives, there will be some negatives and incorporating a company is not different. These disadvantages must be carefully weighed in against the benefits of running a limited company. These factors often lead to individuals choosing not to go the route of limited company and operate as a sole trader instead. However, each case must be judged on its own merits and the consideration should be given accordingly. Following are the major factors that must be considered before setting up a limited company.

Higher Stamp Duty Land Tax (SDLT)

While companies enjoy some tax advantages, they also face disadvantages, particularly with Stamp Duty Land Tax (SDLT). SDLT is charged on the acquisition of land or property in the UK, and while it applies to both individuals and companies, companies are subject to a higher rate, known as the 3% surcharge. Additionally, individuals can benefit from first-time buyers’ relief, which significantly reduces their SDLT liability, but this relief is not available to companies.

Moreover, when companies purchase a residential property worth over £500,000, the SDLT payable is 15% of the total property value.

However, there is a potential remedy for your concerns. Companies with certain specific business models are eligible for relief from the flat 15% SDLT rate and instead pay SDLT at the 3% surcharge rate, providing some respite.

Annual Tax on Enveloped Dwellings (ATED)

Annual Tax on Enveloped Dwellings (ATED) is an annual tax payable by companies that owns UK residential property valued at more than £500,000. ATED is applicable to non-natural persons, ranging from companies to partnerships with a corporate partner. ATED is a tax paid in advance, for example the due date to file ATED returns for the year 2024/25 is April 30, 2024, and the tax liability ranges from £4,400 to £287,500 per property. Therefore, it is crucial to consider the applicability of ATED to your situation before deciding on company incorporation.

However, HMRC offers various reliefs from ATED charges to incentivise companies to engage in specific types of businesses, thereby reducing the huge ATED charge. Some of these businesses include property rental business, property trading business and property development business.

The list of the relief does not end here. More of these reliefs are explored on our article Reliefs Under ATED.

Note: Its important to note that companies qualifying for the relief must still file a nil ATED return.

Registration and Compliance Costs

Running a company comes with a cost, the most common of which is the higher compliance costs. Companies must send copies of the statutory accounts to all shareholders, Companies House, and HM Revenue and Customs (HMRC) as part of the Company Tax Return. Along with these costs come the professional fees for professional advisers assisting in the process.  

Additionally, companies undergoing voluntary strike off will incur certain additional charge.

Choose a Name

The first step in setting up a company is similar to naming a newborn baby: you need to choose a name. However, there are strict rules that must be followed when naming a company. For instance, the company name cannot be too similar to an existing registered name, such as "Hands UK Ltd" and "Hand’s Ltd." These rules are detailed on the HMRC website.

Additionally, the company name must end in either "Limited" or "Ltd," unless the company is a registered charity or limited by guarantee. Additionally, the name should not be identical to another registered company’s name or trademark. If a conflict arises due to a matching name or trademark and a complaint is filed, you may be required to change the name or trademark.

Therefore, it is crucial to use the companies house register to check the availability of the company’s name and the trade mark searcher to find the details of the trader marks.

Appoint Directors and a Company Secretary

Once the name for the company has been chosen and finalised, the next step involves appointing a director and a company secretary. Although having a company secretary is not mandatory for private limited companies, it is a legal requirement to appoint at least one director. The director is legally responsible for running the company and ensuring that company accounts and reports are properly prepared.

Appoint Directors and a Company Secretary Setting up limited company

The director must be at least 16 years old and provide their correspondence address, which will be made publicly available. The main responsibilities of a limited company’s director is to follow the company’s rules, keep company records and report changes, and file the company’s accounts and tax returns. Failure to meet the responsibilities may result in fines, prosecutions, or disqualification from being a company director.

Decide on the Shareholders or Guarantors

In addition to having at least one director, a limited company must also have at least one shareholder or guarantor, depending on whether the company is limited by shares or by guarantee.

Companies limited by guarantee differ from those limited by shares in that they require a ‘guaranteed amount’—the sum of money guarantors promise to pay if the company cannot meet its debts. In companies limited by shares, directors generally receive one vote per share on company decisions and are eligible for dividend payments.

It's worth noting that a shareholder or guarantor can also serve as a director. Directors receiving dividends from UK companies must pay tax on any dividends exceeding the personal allowance. Besides the personal allowance, taxpayers are entitled to a dividend allowance each year. For the tax year 2024/25, the dividend allowance is set at £500, reduced from £1,000 for the tax year 2023/24. The tax rates on dividends over the allowance differ from those on income from non-savings and savings sources. For a taxpayer with only dividend income, the dividend tax is calculated at the following rates:

Taxable Dividend Income

Tax Rates

0 – £37,700

8.75%

37,701 - £125,140

33.75%

Above 125,140

39.35%

A Practical Example

Mr Orhan gets £3,000 in dividends and earns £37,700 in salaries for the tax year 2024/25, giving a total income of £40,700.

In this scenario, his income tax would be calculated as follows:


Non-savings

Dividend

Salaries

37,700


Dividend


3,000

Less: Personal Allowance

(12,570)


Taxable income

25,130

3,000

Income tax computation:



20% on non-savings Income of £25,130

5,026


0% on Dividend allowance of £500


0

8.75% on the remaining dividend of £2,500


218.75

Total income tax

£5,244.75

In this instance, Mr Orhan’s income tax liability amount to £5,244.75.

Once the shareholders or guarantors are chosen, the next step involves identifying and recording the individuals who own or control your company, i.e. anyone holding more than 25% of the shares, known as persons with significant control (PSC). These records must be maintained on the company’s PSC register and included during the registration. If a PSC cannot be identified or the company does not have one, HMRC must be informed.

Prepare Documents that Govern the Company

A crucial step in setting up a limited company involves preparing the governing documents, namely the Memorandum of Association (MOA) and Articles of Association (AOA). The MOA is a legal statement signed by all initial shareholders or guarantors, agreeing to form the company. The AOA is a document containing the written rules for running the company.

If you register the company online, the MOA will be automatically created. However, if you choose to register by post, you can use an MOA template.

Record-Keeping

As previously mentioned, companies are required to maintain detailed records, including information about the company itself as well as its financial and accounting records. They must also keep records of ‘people with significant control.’

Setting up limited company Record-Keeping

These records generally need to be retained for six years from the end of the last financial year to which they relate. If any records are lost, stolen, or destroyed, the corporation tax office must be informed immediately, and this should be noted in the company’s tax return as well.

Failure to maintain proper records may result in HMRC imposing fines of up to £3,000 or disqualifying the company directors.

Register the Company

After completing all the necessary steps, the final task is to register the company with Companies House. You will need to select a SIC code and an official address to complete the registration. A SIC code is a code that defines what your company does. One company can generally have up to 4 SIC codes, which can be selected from the Companies House. 

You can register your company either online or by post. The registration generally comes at certain costs and the company will be usually registered within 24 hours. Companies can generally be registered for the corporation tax at the same time as registering with Companies House.

Conclusion

Setting up a limited company involves navigating a series of detailed steps and understanding both the benefits and drawbacks. While the term "limited" might suggest constraints, a limited company actually provides significant protections and advantages for business owners. The benefits, such as lower corporation tax rates, full mortgage interest deductions, and the ability to claim capital allowances, can make this structure particularly appealing for certain types of businesses, especially in the property rental sector with huge mortgage interest.

Ultimately, whether to set up a limited company is a decision that depends on individual circumstances and business goals. Each case should be assessed on its own merits, and professional advice can be invaluable in making the right choice.

Frequently Asked Questions

Can a UK limited company buy property?

Yes, since a limited company is a ‘non-natural person’, the limited company can do own any assets generally owned by individuals.

How much does it cost to set up a limited company in the UK?

The registration fee to set up a limited company can vary, depending on the choice of registration method. In addition to the registration fee, there may be other costs associated with corporation incorporation, especially professional fees, which are generally individual specific.

Can a UK Ltd company own property abroad?

Yes, there is no restriction to companies owning the property abroad. However, caution must be taken as the company may be liable to taxation on the UK as well as abroad.

Is it worth setting up a limited company UK?

There is no straight answer to this question. Each case must be weighed against its merits and the decision made. The pros of incorporating a limited company for one person may not necessarily be the case for the other person.

You can explore our detailed article "Buying Property through a Limited Company - The Pros and Cons" on when it would be better to sell property as an individual versus through a limited company.

Need expert advice on Setting Up a Limited Company in the UK?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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