What are the benefits and disadvantages of holding property in a limited company in the UK?

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First, bear in mind that there are two types of property: commercial property and residential property. This article is about buying residential property in a limited company. For the benefits of holding commercial property in a limited company through a Small Self-Administered Scheme (SSAS), a pension scheme (set up as a trust with twelve or fewer members of the company), go to my article: What are the benefits of holding commercial property in a SSAS?
 
Buying an investment property in a limited company is beneficial because most of the taxpayers buying these properties are higher rate taxpayers, who would otherwise end up paying 40% tax. Whereas a company, whatever profits it makes, is charged 20% on profits. The difference in terms of personal tax liability, then, as you can see, is huge. See the Table here.
 
Additionally there is no interest restriction on a limited company whereas as an individual or sole trader you cannot claim all the interest.
 
Overall, whether you should be property in a company is a no-brainer: you should no longer hold investment properties in your sole name anymore.
 

Buying residential property through a limited company, what are the advantages?

 
Purchasing investment property through the company is advantageous, but you should seek the advice of an accountant or another independent professional with comprehensive knowledge of the UK tax system before you do so. As I mentioned, it may not necessarily be to everyone’s advantage, but as a rule, it will benefit higher rate taxpayers. Note, however, that you should not buy your main home through a business.
 
Changes to taxation for personally held investment properties
 

  • BTL properties in a sole name attract higher rate tax than those bought in a company. 
  • From 2017 to 2020, the tax relief on interest for BTL property for an individual is being withdrawn over three years from 45% to 20%. 
  • Remember as well that if you own property personally, the rate of tax you pay on the profit from your property will be added to all you other income, and this could nudge you into the higher rate tax bracket.
  • In addition, Capital Gains Tax (CGT) will apply at either 18% or 28% (maybe a combination of both), again depending on the level of your taxable income.

 
Changes to taxation for investment properties held by companies
 
The change that has been applied to personally held properties does not affect property investments held in limited companies, even if you are higher rate taxpayer. This is why higher rate taxpayers should consider this option.
 
Limited companies do not pay CGT, but pay Corporation Tax on their chargeable gains with fewer reliefs and exemptions than those available to individual taxpayers, instead. If you buy investment property in a limited company, corporation tax is payable on the profits (20% for 2015/16 reducing to 18% by 2020), providing it is less than £300,000 p.a., which is less than the higher income tax rate (40% for £31,786 to £150,000; 45% over £150,000).
 
Capital Gains Tax
 
When you come to sell a property, the capital gain will be charged at the corporation tax rate of 20%.
 
Two examples
 
Rose buys a property as an individual
 

  • Rose owns an investment property, a house, and is a higher rate (45% taxpayer) with a net rental income of £100,000 and mortgage interest of £90,000. 
  • Before April 2017, she would have been paying £4,500 income tax on profits of £10,000, but as of April 2020, she will have to pay £27,000 income tax. 
  • This means that by applying her marginal tax rate to the rental income (£100,000 x 45%) her tax liability is £45,000, and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) will mean her tax relief is £18,000.
  • Rose has a tax bill of £27,000 (£45,000 less £18,000), which means her overall loss after tax will be £17,000. It also means she will have insufficient funds to make the repayments from her profit.

 
Brad buys through his company
 

  • Brad is another higher rate taxpayer and buys a house in his company. This means the new measures will not affect him, and he receives full mortgage interest relief. 
  • With corporation tax charged at 20%, due to fall to 18% in 2020, using the same example as given for Rose above, Brad’s company will pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.
  • Then from 2020, Brad’s company pays out its net profits of £8,200 as a dividend. Brad’s income tax liability will be £1,220, giving him £6,980 net of all taxes. 

 
As you can see, holding the property in the company is clearly better than holding the property as an individual. In addition, buying rental properties in a company means that you could make your children or grandchildren shareholders of the company. They would still have to pay tax on any dividends, capital distributions, sales of shares, however, and if under 18 years, you would be liable for the tax.
 
Transferring property to a limited company
 
This is another matter, and you should be very careful about transferring property currently in sole ownership to a limited company.
 

  • Transferring an investment property to a company can be complicated and will probably attract higher solicitor and accountant’s fees. 
  • It may be difficult to transfer the mortgage.
  • Transferring a personally held property to a limited company may be considered a disposal for Capital Gains Tax (CGT) purposes, so you could face a tax bill.

Other considerations

  • There may be a stamp duty and land tax charge (SDLT) charge for properties worth more than £125,000. 
  • If the investment property bought in a company is more than £500,000 there is a 15% SDLT charge 
  • It may also attract the Annual Tax on Enveloped Dwellings (ATED), unless you can demonstrate that the property will be let out commercially to third parties, in which case SDLT rate of 4% will apply. 

 
To conclude, all of this stacks up to make transferring a property to a company quite expensive and risky. It is for this reason that it is probably better to retain existing investment properties personally and to buy future properties via a company. But you should speak to an accountant.
 

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