Purchasing property has long been considered a sound investment strategy, whether for capital growth, rental income, or long-term financial security. Traditionally, many individuals have opted to buy properties in their own name. However, in recent years, more investors are shifting towards buying property through a limited company. This strategy offers numerous financial, tax, and operational advantages, making it a superior option for many real estate investors. This article explores why buying property through a limited company is better than purchasing it individually.
- Tax Efficiency and Savings
One of the main reasons investors are drawn to purchasing property via a limited company is the tax advantages. Here are some of the key tax-related benefits:
a. Lower Corporation Tax Rate
When you buy property through a limited company, any profits made from rental income or property sales are subject to corporation tax rather than income tax. In the UK, for example, corporation tax rates are typically lower than personal income tax rates. Corporation tax is currently set at 19% (as of 2023), while higher-rate taxpayers face income tax rates as high as 40% or even 45%. The lower tax rate can result in significant savings over time, especially for those with substantial rental portfolios.
b. Deductible Expenses
A limited company can deduct a wide range of expenses from its taxable income, including maintenance costs, agent fees, mortgage interest, and property management fees. This can reduce the company’s taxable profits, leading to further tax savings. While individuals can also deduct some expenses, the scope is often more limited, especially since recent tax reforms have restricted the ability to offset mortgage interest against rental income for individual landlords.
c. More Favorable Mortgage Interest Tax Relief
In the UK, individual landlords have faced restrictions on the amount of mortgage interest they can deduct from their rental income since 2017, as part of the phased introduction of Section 24 of the Finance Act. For individuals, mortgage interest relief is capped at 20%, which has reduced the profitability of property investments. In contrast, limited companies can still deduct full mortgage interest as an expense, which can significantly enhance the returns from property investments.
d. Dividends and Salary Options
For shareholders of a limited company, there are flexible ways to extract income. The company can pay dividends, which are often taxed at lower rates than personal income tax. This can be especially beneficial for investors who are higher-rate taxpayers when buying property individually. Additionally, directors of the company can pay themselves a salary or take a combination of salary and dividends, allowing for more tax-efficient planning.
- Inheritance and Estate Planning Benefits
Property investors often consider the long-term implications of their investments, especially with regards to passing assets on to future generations. Limited companies offer better options for inheritance and estate planning:
a. Inheritance Tax (IHT) Planning
Properties held individually can attract significant inheritance tax upon the owner’s death, often at a rate of 40% on assets above a certain threshold. However, with careful planning, holding properties within a limited company structure can provide opportunities to reduce inheritance tax liabilities. For instance, company shares can be transferred gradually to heirs over time, or certain trusts can be established to shelter assets from excessive taxation. This flexibility is not available when properties are owned outright by individuals.
b. Easier Transfer of Ownership
When property is owned via a limited company, it’s often easier to transfer ownership without triggering taxes. Shares in the company can be sold or gifted, potentially allowing a more efficient transfer of wealth between generations. This reduces the need to sell properties or face significant capital gains tax or stamp duty obligations, as would be the case if the property were owned by an individual.
- Improved Access to Finance
Another advantage of buying property through a limited company is the increased ability to secure financing:
a. More Favorable Mortgage Terms for Portfolio Landlords
Many lenders offer mortgage products specifically tailored for limited companies. While historically there were fewer options available, the growing trend of buying property via limited companies has led to more competitive mortgage deals. For portfolio landlords with multiple properties, borrowing through a limited company can provide better terms, including lower interest rates and higher loan-to-value ratios.
b. Ring-Fencing of Personal Assets
By purchasing property through a limited company, personal assets are protected from business liabilities. Should the business encounter financial difficulties, the company structure provides a buffer between the company’s obligations and the owner’s personal wealth. This is not the case when buying property individually, where personal assets could be at risk if there are any legal or financial disputes involving the property.
c. Flexibility to Raise Capital
Limited companies have the ability to raise capital more easily than individual buyers. A limited company can issue shares to investors or secure loans based on the strength of its overall portfolio, allowing for greater flexibility in expanding property investments. This corporate structure can be beneficial for scaling operations quickly or adapting to new investment opportunities.
- Enhanced Business Reputation and Credibility
Purchasing property through a limited company can also offer reputational and credibility benefits. Operating under a company name adds a level of professionalism that can help in negotiations with vendors, lenders, and contractors. It signifies to potential business partners that the property investment is being treated as a serious, well-structured business venture rather than a hobby or side project.
This added credibility can lead to better deals, more favorable business relationships, and even opportunities to attract external investment. Limited companies are also subject to certain regulatory standards and reporting requirements, which can offer peace of mind to partners and stakeholders involved in the business.
- Opportunity for Multiple Investors
A limited company structure allows for multiple shareholders, meaning several investors can pool their resources to buy property. This can open up opportunities to invest in larger, more profitable ventures that would otherwise be out of reach for a single buyer. Additionally, with proper agreements in place, shareholders can enjoy the benefits of property ownership without the operational responsibilities of managing the properties themselves.
Multiple investors can also diversify risk across several properties, reducing the impact of any one investment underperforming.
- Long-Term Investment Strategy
For investors with a long-term outlook, holding property through a limited company can make more sense than buying individually. The company structure provides flexibility in managing assets, selling properties when necessary, or acquiring new ones to meet evolving financial goals.
Additionally, any profits retained within the company can be reinvested into further property purchases or other investments, growing the portfolio tax-efficiently over time. Individuals are often subject to capital gains tax on property sales, which can limit the amount of funds available for reinvestment.
Conclusion
In today’s dynamic property market, purchasing property through a limited company offers a range of compelling advantages compared to buying individually. From tax efficiency to improved financing options, enhanced estate planning, and better credibility, the benefits of the limited company structure make it an attractive option for serious investors.
While there are setup costs, additional legal and accounting requirements, and ongoing responsibilities that come with managing a limited company, these considerations are often outweighed by the financial advantages. For those looking to build a property portfolio or maximize returns on their investments, buying property via a limited company is a strategy that delivers both immediate and long-term benefits.