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Buying a Property Through a Limited Company: Pros & Cons | CMME

Buying a Property Through a Limited Company: Pros & Cons | CMME

August 25th, 2021

Contractors and self-employed professionals are starting to see more of what normality will look like as we begin to emerge from the pandemic (we’re optimistic) and that the changes to IR35 have been implemented – many are looking for their next opportunity; like buying property through their limited company.

Whilst interest rates are at a historical low and the market is experiencing such buoyancy, could buying a property through your limited company be the next step for you? It’s a question with a lot of weight to it in reality and you should understand the pros and cons of this option before making any decisions. That being said, there’s a reason this long-term investment option is a good fit for so many professionals like you. We’ll discuss them here.

What’s in the Blog?

  • Why should you consider buying a property through a limited company?
  • Why do people use a limited company for property investment?
  • What options do you have?
  • Transferring property to a limited company?
  • Getting mortgage ready: tips to help you on your way
  • Establishing your limited company
  • Useful resources

Why should you consider buying a property through a limited company?

It’s important to understand the basics of a set-up like a limited company before you consider property investment, strategically speaking, when you have an informed basis of your information it will allow you to make the best decision for your needs and circumstances.

So, to start from the beginning:

The government outlines a Limited Company as being: A company ‘limited by shares’ or ‘limited by guarantee.

Limited by shares

For companies that are limited by shares, the distinction is that they are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee

Companies limited by guarantee are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount’
  • invests profits it makes back into the company

According to 2020 House of Commons Business statistics, there were six million small/medium enterprises (SMEs) operating in the UK. Of those, approximately two million were limited companies.

With the self-employed sector currently making up a whopping 4,355,000 in 2020 according to IPSE – contributing £316billion to the UK economy, buying property through a limited company is a valid investment option for many, and one that appeals for a few reasons.

Why do people use a limited company for property investment?

Individuals choose to use a limited company to facilitate their buy to let property investment goals for a variety of reasons. One of the main and most incentivising reasons is tax. Though as a mortgage broker we can’t advise on tax efficiency we can outline the different reasons this might appeal; a limited company has a corporation tax rate of 19% this is in comparison to the 40% income tax rate for high-rate taxpayers. It is also much lower than the 45% income tax rate for additional rate taxpayers.

The other significant reason for UK landlords to consider use of a limited company is to minimise risk. As a sole proprietor, your personal assets could be at risk if legal action were taken against you for any reason and you may have to personally pay out large sums of money to the claimant. A limited company when prosecuted does run the risk of its assets being taken away, however, you as a shareholder of the company can relax in the knowledge that your personal assets won’t be at risk.

What options do you have?

When it comes to owning a buy-to-let property, there are two ways to invest – in your personal name or via a limited company.

Prior to April 2017, landlords who also owned homes in their name could deduct their mortgage interest from their rental income before paying income tax. This meant that the income landlords had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many landlords within a lower income tax bracket.

However, this gradually changed with the amount that can be written off dropping by 25% each year. Now, all rental income will be eligible for income tax, with tax relief being gradually reduced until only basic rate relief (20%) is available.

This doesn’t apply, however, if the buy-to-let property in question is owned through a limited company, as the property is then viewed as a business and all expenses can be written off.

It’s also important to remember that you can only use your limited company for buy to let properties as this is not a viable option for residential properties.

Getting a mortgage through your limited company

If you operate as a limited company, your income will probably consist of a salary and dividends. Lenders will need to consider both as your income for your mortgage application. In some instances, though there is no guarantee, lenders may be able to use your operating or net profit in addition to your salary.

When bought through a limited company, a landlord can still take an income from their rental property, in the form of dividends. They will only pay tax on the amount of dividends they take, theoretically cutting their tax bills significantly.

Of course, there can also be a number of potential downsides to investing in property via your limited company and it’s important that you are aware of them, as well as the potential benefits.

For example, mortgage costs can often be higher on limited company buy-to-let mortgages and the costs involved in holding buy-to-let properties are different depending on whether it’s done through an individual or a limited company.

Investing through a limited company structure incurs two major tax bills – capital gains tax and stamp duty, which can negate any benefits from tax relief, particularly for landlords with just a small number of properties.

These factors must be weighed up in order to determine which is the best set up for you and your property investment.

Try our Buy to Let Mortgage Calculator

Transferring property to a limited company?

If you transfer property to a limited company, you will be required to refinance your buy to let mortgages. It is, therefore, a long process and one that needs to be managed very carefully. Mortgage interest rates are typically higher in a limited company than if you own rental properties in your own name.

Mortgage Tips: Limited Company Mortgages

1. Use a specialist broker

The truth is that most lenders have little understanding about the contracting market, and as a result, their standardised procedures do not accommodate contractors, particularly when it comes to Limited Company mortgages. We have agreed bespoke underwriting agreements with a comprehensive range of lenders enabling us to secure mortgage funding based on a multiple of your contract rate alone.

2. Maintain A Spotless Credit Rating

Lenders have become increasingly risk-conscious and are continually on the lookout for reasons not to lend. A good deposit and a satisfactory income is often not enough to secure a mortgage. That is why it is essential to keep your credit rating up to scratch, leaving the lender no reason to turn you down.

Read our article on Understanding Your Credit Score here.

3. Update All Relevant Documents

You will need to provide minimal documentation to support your application. Ensure your CV is up to date as it will be used to prove your skills and experience. You will also need to obtain a copy of your current contract as this will be used to demonstrate your earnings. Using both documents we can attempt to avoid any issues to do with affordability.

Useful Resources

Whether you want to talk specifics or are just after some general advice, CMME can help. Speak to us today on 01489 223 750 for a completely free, no-obligation mortgage consultation. Or click the button below. 

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