Reasons To Buy Within A Ltd Company?
From a purely financial standpoint, there are three compelling reasons to consider holding property within a limited company rather than in your personal name.
1. Tax Treatment of Profits:
Personal Name: If you own a property in your name, rental profits are added to your overall income and subjected to income tax. In contrast, a company's profits are liable for Corporation Tax, often at a considerably lower rate than the higher income tax rate - currently sitting at 19%
Flexibility: Holding property in a company allows for flexible dividend payouts, strategic timing for tax efficiency, and potential distribution to family members in lower tax brackets.
2. Tax Treatment of Mortgage Interest:
Individual Investors: Mortgage interest is no longer fully deductible for individual investors, with only a basic rate allowance permitted (otherwise known as a 20% tax credit). Companies, however, can still claim mortgage interest as an allowable expense, offering a potential advantage for higher-rate taxpayers who use mortgages to acquire properties (numerical example to follow at the end)
3. Inheritance Tax Planning:
More Options: Property held within a company provides additional avenues for Inheritance Tax planning. While the specifics are complex and require advice from a specialist tax advisor, trust structures and unique share arrangements can be utilised for potential Inheritance Tax savings.
Why Not Choose a Limited Company?
While there are clear advantages to using a limited company, there are downsides to consider as well.
1. Mortgage Rates:
Limited company mortgages were once limited, expensive, and had lower borrowing limits. Although the market has evolved with more options and lower rates, limited company mortgages are still generally more costly than individual mortgages, with higher interest rates and fees.
2. Dividend Taxation:
Tax Implications: When withdrawing rental profits from the company, dividend taxation applies. This means paying both corporation tax and dividend tax on the income taken out, potentially offsetting the tax advantages gained within the company. If you choose to keep the rental profits rolled up within the company, you need not worry about didvidend tax.
3. Extra Cost and Hassle:
Administrative Burden: Operating through a limited company involves higher accountancy costs and increased paperwork for annual company accounts, adding an extra layer of complexity compared to personal ownership.
How to Decide:
The decision to use a limited company for property investment depends on several factors.
Income Levels: Higher-rate taxpayers may find the allure of the lower corporation Tax rate compelling, especially if there is no option to allocate income to a lower-earning spouse.
Income Utilisation: Choosing between leaving profits within the company for future investments or taking them out for personal use can impact the overall tax strategy.
Use of Mortgages: For those heavily reliant on mortgages, the ability to claim the entirety of mortgage interest as an operating expense may favor a limited company structure.
Numerical Example:
Let's take an example of a property achieving £1,000 in monthly rent with £500 in monthly mortgage interest costs
Owning this property in an higher rate taxpayer individual's name would mean that tax would be payable on the full amount of rent, equating to £400. You'll get a 20% tax credit on the mortgage interest, equting to £100. This would equal a net profit of £200
Owning this property in a ltd company structure would mean that tax would be payable the profit of £500, equating to a tax bill of £95. This would equal a net profit of £405
As you can see here, you more than double your profits by owning the property within a Ltd Company structure.
The Bottom Line:
While the trend toward limited company property ownership is prevalent, it's crucial to recognize that there are both advantages and disadvantages. Making assumptions can be costly, and it's challenging to change ownership structures once a property is acquired.
Consultation with an accountant is highly recommended to navigate the complexities and make an informed decision tailored to individual circumstances.
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