In recent years, the concept of owning property through a limited company has gained traction among real estate investors, often marketed as the ultimate answer to numerous financial & tax concerns. Proponents of this scheme highlight benefits such as tax efficiencies, asset protection, and improved portfolio management. However, beneath the surface of these appealing claims lies a complex web of potential drawbacks that can undermine the very advantages they claim to offer.
This article aims to dissect the advertised benefits of the "One Property One Company" model, revealing how these perceived advantages may not be as advantageous as they seem, and how they can lead to increased complexity, higher costs, and unforeseen risks for property investors.
1. Option to Sell Property or Shares
Selling shares instead of the property might appear tax-efficient, but it can complicate the transaction. Moreover, selling shares instead of property may limit liquidity, as shares can be harder to sell quickly. Buyers could inherit any liabilities, such as debts or legal disputes, tied to the company. This risk can make the property less attractive to potential buyers.
Additionally, tax benefits from selling shares are uncertain and subject to changes in tax laws, potentially leading to unexpected tax burdens.
Example,
A real estate investor, Sarah, set up a company solely to hold residential property. When she decided to sell the company directly, her pool of potential buyers became less. Finally, she found a buyer interested in purchasing the shares of her company instead of the property directly. However, the buyer's due diligence revealed an unresolved legal & tax
dispute tied to the company, leading the buyer to withdraw from the deal. Sarah then had to settle the dispute, delaying the sale and reducing the property's marketability.
2. Greater Flexibility in Portfolio Management
Managing properties through separate companies can lead to a fragmented portfolio that's harder to oversee. Each company requires its own set of accounts, tax returns, and compliance checks, increasing the administrative burden and costs. This complexity can overwhelm investors, irrespective of the size of the portfolio and negate the benefits of flexibility.
Example,
John, a small-scale property investor, decided to manage each of his three rental properties through separate companies to keep them isolated. However, the administrative burden of managing three sets of accounts, filing three separate tax returns, and ensuring compliance for each company became overwhelming. He had to hire additional accountants, significantly increasing his operational costs. The administrative complexity ultimately led to missed filing deadlines, resulting in penalties and higher costs than if he had managed the properties under a single company.
3. Lower Corporation Tax
Although corporation tax rates may be lower than personal tax rates, the overall tax burden could be higher due to a potential double layer of taxation—first at the corporate level and again to the shareholders/directors, when profits are drawn as dividends.
Moreover, corporation tax rates have risen lately, so the perceived benefit could diminish or even turn into a disadvantage.
Example,
In the UK, corporation tax rates increased from 19% to 25% in 2023 for companies with profits over £250,000. Emily, a property investor, initially set up separate companies for her properties to benefit from the lower corporation tax rate. However, with the tax hike, she found that the tax savings were less significant, especially when she had to pay additional tax on dividends when withdrawing profits from the companies. The combined tax burden, corporation tax rate at 25% and the dividend tax rate that can go as high as 39.35% was now higher than if she had simply held the properties personally.
4. Better Protection for Each Property
Separating properties into different companies might protect each asset individually, but it also leads to increased legal and administrative costs. The need for separate insurance policies, legal advice, and company setups for each property can be cumbersome and expensive, potentially eroding any financial protection benefits.
Example,
Mark, an investor, decided to protect each of his properties by placing them in separate companies. However, he soon realised that each company needed its own insurance policy, legal agreements, and annual filings. The cumulative cost of maintaining these separate entities, including legal fees and insurance premiums, significantly reduced his overall profits. This was particularly evident when one of his properties needed extensive legal work due to a tenant dispute, which became costlier because of the company structure.
5. Greater Visibility for Transactions
While clear financial records for each property might seem advantageous, it also results in a more complex accounting structure. Managing multiple sets of accounts increases the likelihood of errors, raises accounting fees, and consumes more time. This added complexity can lead to inefficiencies and increase the risk of mistakes in financial management.
Example,
Jane, a property investor, believed that having separate companies for each property would make tracking income and expenses easier. However, she found herself struggling with the complexities of managing five different sets of accounts. The increased accounting workload led to higher fees from her accountant and frequent errors in tax filings, which resulted in penalties from HMRC. The supposed benefit of visibility was outweighed by the inefficiencies and added costs.
6. Better Access to Company BTL Mortgages
While companies may have better access to Buy-to-Let (BTL) mortgages, lenders often scrutinise each company’s financial health separately. If one of your companies is underperforming or has a history of issues, it could affect the mortgage terms for new properties. Maintaining multiple credit profiles for each company could limit your financing options and lead to less favourable mortgage terms overall.
Example,
Tom, an investor with several properties, set up individual companies for each to secure better BTL mortgage rates. However, one of his companies experienced financial difficulties due to a prolonged vacancy, leading to missed mortgage payments. When Tom tried to secure a mortgage for a new property under a different company, the lender considered the financial struggles of his other company, resulting in less favourable mortgage terms. The perceived advantage of better access to mortgages turned into a drawback due to the interconnected risks across his portfolio.
Conclusion
While the "One Property One Company" approach may appear appealing at first glance, the reality is often fraught with challenges that can negate its purported benefits. From the complexities of managing multiple entities and the potential for increased tax burdens to the risks associated with selling shares and the high costs of compliance, investors must carefully weigh these factors against their investment goals.
Ultimately, a thorough understanding of the implications of this ownership structure is essential for making informed decisions in the property market. Investors should consider seeking professional advice to navigate the intricate landscape of property investment and ensure that their strategies align with their long-term financial objectives.
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