If you are thinking of buying an investment property, you are probably asking yourself whether you should buy it through a limited company or under your own name. Everyone has different circumstances so the best decision will differ from person to person. The aim of this article is to highlight some the main differences between these two ways of buying property.
Over the last couple of years more and more people are turning towards property investment as a way of increasing their income, creating a safety net for the future and protecting savings from the effects of inflation.
Before buying an investment property it is important to decide whether you want to set up a limited company or make purchases under your personal name. The choice will depend on your own personal circumstances, so it’s important to consider these as there is no right or wrong answer. To help you decide, we will outline the main differences between these two options in this article.
Please note: we are active investors in the property market and not tax specialists. As such this article is provided for information purposes only. We strongly recommend that the reader seeks professional tax advice from qualified specialists before getting involved in property investment. Also note that we are investors in England & Wales and so this article is based on our knowledge of the laws that apply here. Differences to be seen in other parts of the UK are outside of the scope of this article.
Differences between owning properties through a Limited Company and personal name:
One of the main differences between letting properties under your name and through a limited company is the way taxable income is calculated. Up until 2017, landlords could claim tax relief on most expenses associated with their buy-to-let properties, including finance costs such as mortgage instalments. However, from 2017, a new taxation scheme has been implemented and the number of expenses landlords can claim for tax purposes has been reduced. From 2020, the amount of income tax relief landlords can get on residential property finance costs has been restricted to the basic rate of tax. This means that allowable deduction of the mortgage interest is now limited to a tax credit at basic rate (currently 20%) on the amount paid in interest on the mortgage.
With the financing costs being the main expense landlords have to face, not being able to claim tax relief on all these expenses means you’ll take home a smaller portion of your income.
On the other hand if you buy the property through a company instead of paying income tax on your rental income, your limited company pays corporation tax, on its profit after interest. This is currently set at 19%, however from 1 April 2023, the Corporation Tax main rate for non-ring fenced profits will be increased to 25% applying to profits over £250,000. A small profits rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. This difference is especially beneficial to the property owners that are already in or near the higher income tax bracket, charged at 40%. The other positive side of that is that you can retain more of your profits, and use them to reinvest in the future.
Capital Gains Tax & Inheritance tax
Limited Company structures also make it a bit easier to deal with the Inheritance Tax and Capital Gains Tax. Family members can be appointed shareholders which gives a lot of benefits in terms of Inheritance Tax and Capital Gains Tax. Landlords owning properties through limited company can also avoid large amounts of inheritance by applying Business Property Relief (BPR) to their income and assets. Since 2013 property investors have been allowed to hold shares which qualify for Business Property Relief in a tax-efficient ISA account.
Whilst buying a property via limited company could be more tax-efficient, there are other costs that determine how much you’re going to take home at the end of the day.
The mortgage will likely be your highest cost, so it makes sense to keep it as low as possible. Mortgage rates are different for personal and limited company borrowers. Limited Companies are offered higher rates than investors buying under their own name.
At the time of writing a standard buy to let rates under personal name will sit around 4% and lending to a limited company will come up to around 5%. These rates are based on a 2 years fixed period with 75% LTV. Please note the mortgage rate market is highly dynamic specially in the current times, so these values will likely be revised in the near the future. Be sure to check what the differences are with your mortgage broker.
Accessing the funds
In addition you should consider the different ways you can access your money. As a private landlord, your income is more readily available in your bank account, and you can use the funds whenever needed. Not only will you have access to your money, but you will also be able to spend your earnings after tax, as you wish.
Under a limited company structure the two ways property investors can take money out of the company is through dividends and if you are employed by the company, say as director, you can pay yourself a salary. Tax thresholds on both of these apply so depending on how much of your earnings you extract from the company the amount of tax you have to pay will vary significantly.
For example, at the time or writing, the dividend allowance is £2,000. Anything above that is taxed.
Personal Credit Score
Investing via limited company can also protect your personal credit score. If your tenants fail to keep up with utility bills or council tax, you as a landlord can be held accountable, and your credit score may be affected. When investing through a limited company, it is the company name that is linked to the property, rather than your own.
It is important to note that investing through limited company will incur additional costs that you do not incur when buying under your name. Owning a business means you need to most likely pay an accountant to submit your yearly accounts and statements. Also the legal fees associated to the purchase and re-mortgage of a property are often higher for limited companies as there is extra work involved compared to similar transactions made as a private individual.
The decision to whether to buy under your own name or via limited company needs to be taken based on your personal circumstances. It all depends on what plans you have for the future. If you think of buying one or two properties then it makes sense to own them under your name, to avoid the typical overheads costs associated with running a limited company. However if you want to keep adding assets to your portfolio and reinvest the money then the limited company structure might be more appropriate solution.
But what if you already own a portfolio under your name, that you have purchased prior to the tax changes?
The changes to income tax relief in 2020 left many landlords in or near the higher income tax band significantly out of pocket. Unfortunately for those who already have personally owned buy to let property, it is not quite as simple as “transferring” their portfolio into a limited company.
Transferring property from one’s Personal Name to a Limited Company
The term “transfer” can be somewhat misleading, as moving your personally owned buy to let property into a limited company is legally a sale and purchase transaction. This means that the process is subject to the same additional costs and fees as any other property purchase, for example:
· Stamp Duty Land Tax
· Capital Gains Tax
· Conveyancing/Legal fees
· Early Redemption Charges (if applicable)
Stamp Duty Land Tax
Just like personal name property purchases, your limited company must pay stamp duty land tax and the 3% second home surcharge (at the time of writing). Please note, there is no exemption on the 3% surcharge for the “first” property purchased within a limited company. For more information and to find out how much stamp duty you’ll need to pay, visit the government website https://www.gov.uk/stamp-duty-land-tax.
Capital Gain Tax
The Capital Gains Tax (CGT) position is complicated. Historically, a sale such as this would mean that you (the seller) would be liable to pay CGT per the standard rules. However, a landmark case (Ramsay v HMRC) back in 2013 ruled that in certain circumstances the landlord could claim incorporation relief under s162 Taxation and Chargeable Gains Act 1992, thereby deferring any tax until the acquiring limited company sells the property.
The critical factor, in this case, was that the landlord and taxpayer devoted 20 hours a week to various tasks associated with running the property: collecting rent, property and garden maintenance etc. Consequently, the property was determined to be a business (eligible for incorporation relief) rather than an investment (ineligible for relief).
While there is no definitive guidance available on what factors HMRC and the Tax Tribunals consider when determining whether a property is a business or an investment, these are the widely accepted guidelines:
A property is an investment if:
The landlord has full-time paid employment not associated with the property
The landlord uses an agent to collect rents and manage the property
The property is a business if:
The landlord selects tenants themselves
The landlord collects rent themselves
The landlord undertakes minor maintenance work themselves
The landlord can demonstrate that most of their income comes from the property/properties
Just as if you were selling to another individual, the standard procedure will apply - a solicitor or conveyancer will be required to ensure the switch is legal.
Early redemption charges and increased mortgage costs
If the mortgage on the property in question is still within the Early Repayment Charge (ERC) period, then you will be required to pay the fee. Generally speaking, it makes sense to wait until this period has lapsed to start the incorporation process. However, with mortgage interest rates currently on the rise, it’s definitely worth investigating your options if you’ve only got a year or so left before your ERCs elapse. As ever with property investment, a lot is determined by your particular circumstances.
There is a lot to consider before starting your property investment journey. However, if you are not sure where to start, one of the first steps should be getting a professional tax advice from an advisor who has experience in the field of property investment. As mentioned already in this article, there is no definite right or wrong when it comes to investing in property. You need to make sure your decision is based on your own personal circumstances and plans for the future.
Do you have more questions?