Disadvantages of using a property investment limited company
There are some disadvantages of using a property investment limited company to purchase buy-to-let properties rather than in personal names when building a portfolio of rental properties.
This article will review the disadvantages and advantages of property investment through a limited company.
It is important to establish whether the advantages of investing in rental property through a limited company are right for you as a landlord and your rental income.
What are the basics of using a property investment limited company?
According to a recent property industry report by UK estate agent Hamptons, from 2018-22 the number of landlords operating their buy-to-let businesses through a limited company has doubled.
Companies House data has highlighted that in 2021 there were 47,400 new buy-to-let companies incorporated across the country.
One of the biggest trends in property investment has been the shift for many landlords from sole traders to limited company status to manage their rental income for financial advantages.
Until 2015, mortgages for companies were less competitive than now, and there was less demand for them from property investors.
The Summer 2015 Budget changed the treatment of mortgage interest, which started a rise in the popularity of mortgage applications from limited companies.
Landlords looking to maximise the rental return on their property investment are advised to review the advantages of a limited company.
Using a company for property investment also has disadvantages in terms of reducing tax liabilities and maximising rental incomes.
What are the disadvantages of buying property through a limited company?
There are advantages and disadvantages of buying property through a limited company structure.
Your personal home is at risk if your property investment portfolio is in your own name and someone sues you.
Mortgage interest rates are between 1-1.5% more in a limited company than they are in your personal name.
Administration and professional costs, including accountancy fees, are higher in a limited company structure for property investors compared to sole traders. This can eat into your rental profits and reduce the advantages of working in a company structure.
Additional administration and financial reporting in a limited company include filing a self-assessment tax return as a director.
You must also file a limited company set of accounts to Companies House and a company tax return to HMRC.
You are paying tax twice: a company will pay 19% corporation tax, and you will also pay income tax on the money that you take out of a limited company from your rental income.
This equates to 8.25% basic rate, 33.75% higher rate and 39.35% additional rate income tax on dividends.
The first £2,000 of dividends are tax-free which is one of the main advantages.
Using a limited company for property investment also means missing out on personal tax advantages that can be gained from rental income.
A limited company does not get a tax-free band.
As an individual, you get an allowance of £12,570 before you pay any income tax without the need of a limited company. This is one of the main tax advantages.
If your spouse is not working it is better to allocate property rental income in their name via a Deed of Trust to gain the personal tax band advantage that is then applied to rental income.
There are other advantages to running your property investment through a limited company.
What are the advantages of a limited company for property investment?
There are distinct advantages to buying and holding property in a limited company structure.
The tax treatment of rental profits is one of the biggest advantages.
If you hold property in a limited company, the rental profits are liable for corporation tax and not personal income tax.
The rate of corporation tax is nearly half of the higher rate of income tax on rental income which is one of the main advantages.
A landlord will still be taxed on the dividends if you take profits out of a limited company used for property investment. But there is flexibility.
You can time dividend payouts for maximum tax efficiency, or distribute them to family members who are only basic rate taxpayers.
Alternatively, the rental profits can be left in the limited company and used to buy the next investment property.
Mortgage interest is no longer an allowable expense for individual property investors, but it is still allowable for limited companies that hold property.
These advantages can radically improve rental profits.
If you pay tax at a higher rate and you use mortgages to buy property, your tax bill will be higher than if you own property in your own name and not in a limited company.
Property held in a limited company presents more options when planning for Inheritance Tax (IHT).
To pass on assets to loved ones without being subject to IHT through the use of freezer/growth shares.
You can start a limited company with a value of £1 and pass any growth onto children to avoid future capital appreciation being subject to IHT.
Property in your own name will be liable to IHT on your death.
Once assets exceed your IHT lifetime allowance (£325,000 to £500,000 for single people and double the amount for married couples) will be subject to 40%.
For every £100,000 that you invest, £40,000 will be subject to IHT.
Another area to consider is that of capital gains tax.
A £100,000 gain in your own name would be taxable at £87,700 (£100,000 less the annual exempt amount). This would be taxable at 28% for high-rate taxpayers being £24,556.
A £100,000 gain in a limited company on a property would be taxable at 19% being £19,000.
Section 24 for buy-to-let activities is another consideration.
Property investment activities are subject to income tax plus NIC.
Although there is the initial tax and double tax issue from extracting tax from a limited company, corporation tax rates of 19% are still less than the income tax band.
The higher rate is 40% for high rate taxpayers and 45% for additional rate taxpayers.
The advantages of using a limited company for property investment are an individual choice for a landlord.
It is worth considering the amount of rental income when looking at the tax advantages of a limited company.
Are limited companies the best structure for property investment?
Limited company structures for property investment can become very attractive for landlords when taking into account the fact that mortgage interest is treated as a business expense.
This makes it possible for a property investor using a limited company to deduct the cost of mortgage interest before paying corporation tax on rental profits.
If you buy property to make value-adding improvements and then sell on for a profit, it is better to purchase property for investment through a limited company.
If you buy property to collect rental income and see the property value rise over a period of years, many property investors traditionally operated as sole traders.
Many sole traders have switched to limited company status for their rental property investment activities to enjoy the advantages of a limited company.
The company structure for property investment is a personal choice and may depend on the level of rental income being accrued.
There are many advantages to using a limited company.
Is it better to invest in property through an investment company?
Some property investors choose to enlist the help of a property investment company when investing in buy-to-let property.
The main benefit for a property investor is time-saving.
Property investors can have many time-consuming elements of property investment carried out for them by an investment firm.
This may be preferable for property investment professionals who work full-time and don’t have the time to research and purchase property for their own portfolio.
Visit here to find out about the pros and cons of working with a property investment company.