Discover the pros and cons of buying property in limited company before you buy.
If you are a property investor, you may purchase properties in a limited company already. However, for those new to property investment, what does it mean to use a limited company, and why should you do it? Read this article to learn more about buying properties for investment and how to structure those purchases to maximise your profits.
Buying property in the name of a limited company is a relatively new tactic that has grown in popularity in recent years. Many landlords, particularly if they have owned investment properties for years, will simply buy the property in their own name, perhaps with a spouse or co-investor. There is nothing wrong with this at all; it can make perfect sense. It is your property; you are paying for it; it goes in your name, right?
But, recently, there has been a huge uptake in property investors buying property under the name of a limited company. But why?
Many people start a new business as a limited company because of limited liability - meaning there is less risk if the business fails or something goes wrong, protecting your personal assets if the business needs to be closed. Is it the same for property? It isn't, particularly if you buy the property using mortgage finance.
So why are investors using a limited company to buy property? What are the arguments for buying a property in a limited company if it is not limited liability?
There are tax benefits. Income generated from a property investment would be taxed at the corporation tax rate, not income tax. Good news if you are already a higher-rate income taxpayer.
It is a simple way to purchase a property with other investors. Joint ventures can get complicated if multiple investors are involved, but opening a limited company and investing in property this way means the company owns the property. The company's directors own the shares, which can be divided however you see fit depending on the level of investment you make.
Of course, a tax benefit is excellent, but are there any negative points you need to be aware of?
- No capital gains allowance. When you sell the property, you will be liable to pay capital gains tax on the total increase in value without any allowances, which is, of course, not the case if you own a property in your personal name.
- You must submit full company accounts, so your accountant bills may be higher.
- Any mortgage funds will have a slightly higher rate of interest attached.
- All company directors will be asked to provide a personal guarantee for any mortgage funds they use, meaning the initial attraction of limited company = limited liability is no longer relevant as you are still personally liable for the loans even if the company is dissolved.
So, although it is becoming very popular among property investors, it might not necessarily be the best way for you to proceed on your property investment journey. Seek professional advice from your accountant before making a decision.
You need to make this decision before you purchase because if you already own a property in your personal name and are considering changing the ownership from your name to that of a limited company, you may be liable for another stamp duty payment. This is because, effectively, you have sold the property to your company, so double-check this before you start making changes.
If you are a property investor and would like advice on your portfolio, contact our team of property experts today. We have years of experience and knowledge about the market and property investments and are happy to help.