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Buying Property Through A Limited Company – The Pros and Cons

Published by Prasun Shrestha
Published Date: December 6, 2022
Categories: Limited Company

The most asked question by individuals interested in buying properties is, ‘Should I buy property via a Limited company or personally?’. However, there is not any definitive conclusion to this.  

It will depend on individual circumstances and numerous factors, which vary from person to person. Some individuals may benefit from limited company, while others are better off buying personally.  

As property accountants, we are here to give you a better insight into this and help you make a tax-efficient decision.  

Advantages of Buying  Property Through A Limited Company? 

From a purely financial perspective, there are few advantages to holding property as a company rather than individually. 

Advantages of Buying Property Through A Limited Company

1. Lower Tax Rates 

The main attraction of using a limited company will be perceived tax savings. If you own a property in your name, the profits made from renting out the property will be subject to income tax which is comparatively higher than the corporation tax rate. 

Income Tax

Corporation Tax

Rate Bands

Threshold

Tax Rate

Basic

£1 - £37,700

20%

19% - 25%

Higher

£37,701-£125,140

40%

Additional

Above £125,140

45%

2. Full Mortgage Interest Deduction

Mortgage interest is not allowed as an allowable expense for individual property investors (excluding some exceptions). You will only be able to claim a basic rate allowance instead.

However, in the case of a company that holds property, it can claim mortgage interest as an allowable deduction in full. For further details on Interest Relief Restriction.

3. Corporation Tax Instead of Capital Gains Tax

Individuals are subject to capital gains tax on gains from selling/transferring properties which is comparatively higher than corporation tax.

On the other hand, companies do not have separate capital gains tax rates, but all the gains are subject to corporation tax.

Capital Gains Tax

Corporation Tax

Rate Bands

Residential Property

Commercial Property

Basic

18%

10%

19% - 25%

Above Basic

28%

20%

4. Indexation Allowance for Companies

Companies are entitled to Indexation allowance to take into effect inflation on the value of property deducted from the sale proceeds to arrive at a chargeable gain, which is then subject to corporation tax.

However, indexation allowance freezes from 1 January 2018, which means no indexation allowance is available for expenditure incurred after 31 December 2017.

5. Access to Tax Reliefs

Companies are provided with tax reliefs to encourage certain activities that individuals cannot enjoy. Some reliefs available to a company are R&D Relief, Super-deduction, special rate first-year capital allowances, Patent box etc.

6. Limited Liability

Suppose the business is successful in obtaining a mortgage without your personal guarantee. In that case, your personal assets will be safeguarded if the company cannot repay the loan.

Disadvantages of Buying Property Through A Limited Company? 

Disadvantages of Buying Property Through a Ltd Company

Dividend Tax on Withdrawal of Profit

One might think that they should always choose to set up a limited company due to the lesser corporation tax rate.

However, when a director decides to withdraw the company profits as dividends, the director would need to pay dividend tax on it.

Rate Bands

Threshold

Tax Rate

Basic

£1 - £37,700

8.75%

Higher

£37,701- £125,140

33.75%

Additional

Above £125,140

39.35%

Note: However, the first £1,000 for 2023/24 (£500 from 2024/25) dividend received in the tax year is taxed at 0%. This is known as 'Dividend Allowance'.

Higher Compliance Costs

Costs associated with incorporating a limited company must be considered for making any decision. Limited companies must file annual accounts and corporation tax returns which may increase the cost.

Hence, a cost-benefit analysis should be done to arrive at any conclusion for setting up a limited company.

Early Trade Loss Relief

Where an individual incurs a trade loss in the tax year in which trade commenced or any of the next three tax years, relief for the loss may be claimed against general income of the three tax years preceding the loss-making year on a first-in-first-out basis.

However, this is not available in case of companies.

Case 1

For Example, “Natalia made a loss of £5,000 in her first year of self-employment for the tax year 2022/23.


She had no other income in 2022/23, but in 2021/22, she had been employed for £40,000. Natalia can offset the loss of £5,000 against her employment income in 2021/22, leading to a refund of some of the tax paid under PAYE for that year.


If Natalia makes a loss in the year 2023/24 of £5,000 and has no other income this year, then this loss can also be set off against her employment income in 2021/22.”

Annual Exemption Allowance for Capital gains

Individuals are entitled to an annual exemption of £6,000 (from April 2023), reducing the chargeable gains and capital gains tax payable. However, in the case of companies, annual exemption is not given

Case 2

For Example, “Andy sold residential property and made a gain of £52,300 in the tax year 2023/24. This was the only gain for 2023/24.


Hence, his taxable gain will be £(52,300-6,000)= £46,300 and capital gains tax will be chargeable on £46,300 rather than £52,300.”

Non-availability of Private Residential Relief

When a limited company owns the properties, it cannot take benefit of private residence relief while selling the property.

Any gains realised by a person selling his own home are not subject to capital gains tax if they have lived there for their entire period of ownership. Individuals who, at some point, designated their home as their sole or primary residence are eligible for this exemption for the period of their occupancy.

When Should I Buy Property as an Individual Instead of a Limited Company?

Buy Property as an Individual Instead of a Limited Company
1

 You are a Basic Rate Taxpayer 

Individuals who are basic rate taxpayers may derive little benefit from buying property from a limited company compared to individuals. The basic rate band is 20%, and the corporation tax is 19% (assuming profit under £50,000). Hence there isn’t any huge tax benefit.

The planning fits the best in the case of an individual who is a higher or additional rate taxpayer, liable to pay tax at the rate of 40% or 45%.

2

Possibility of Splitting Rental Income to Your Spouse/ Civil Partner  

Setting up a limited company may not be viable if you can split the rental income with your spouse to use their personal allowance and basic rate band.

It is better to split the rental income amongst the spouses rather than setting up a company for buying properties and generating income. 

3

 No Plan of Building Property Portfolio   

It also depends upon the plans of a property investor. Setting up a limited company may be a costly option if the plan is only to have one or two properties.

However, if the plan is to expand the portfolio to multiple properties, it may be cheaper and easier to create a limited company from day one. 

Find more details on ‘Jointly Owned Properties | Top Tax Saving Tips’. 

I am a Foreign Investor; Should I Always Buy via Limited Company?

Buy via Limited Company

Treatment of Dividends from UK Companies to Non-Residents 

If a non-resident individual incorporates a company in the UK and the company is UK resident, the company will enjoy the benefits that any other UK company will enjoy. 

Moreover, when the profits are taken out as dividends by the foreign investor, they will not be taxable in the UK, as dividends from UK companies are disregarded income for non-residents.

Profits Chargeable to Corporation Tax

If a non-resident company is used for buying UK properties and generating income, the income generated from such properties will be taxed at corporation tax in the UK.  

Until 5 April 2020, even non-resident companies were subject to UK income tax. But this has changed after 6 April 2020, and now non-resident companies are subject to corporation tax just like any other UK resident company.

However, a non-resident individual will be liable to pay UK income tax on their income from UK properties. The availability of personal allowance for a non-resident individual depends on various conditions. 

Stamp Duty and Land Tax rates  

Different Stamp Duty Land Tax (SDLT) rates apply to non-UK resident individuals/companies while purchasing property in the UK. The rates are 2 percentage points higher than those that apply to purchases made by UK residents. 

Stamp Duty Tax Rates

Withholding Taxes Under Non-Resident Landlord Scheme

Both non-resident individual and non-resident company landlords are subject to Non-Resident Landlord Scheme (NRLS)

The NRLS imposes obligations on the tenant or the letting agent to deduct 20% tax from the rent and account for this to HMRC before paying it over to the non-UK resident company/individual.  

However, if the non-resident landlord wants to get UK rental income without such deduction, they can apply to HMRC through NRL1(individuals) and NRL2(companies). 

The rest of the comparison is the same as in a UK resident company and individual. Hence, the choice entirely depends on individual circumstances and the best fit. 

The above article considers tax rates applicable till the tax year 2022/23. Access the rates for 2022/23 and 2023/24. 

Conclusion

The following key points summarised in this table are to be compared to decide what is best for you. This can guide you through your question, Should I buy property via a Limited company or personally?’ 

should i buy property from ltd
Prasun Shrestha
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