UK Property Investment: A Comprehensive Guide To Using A Limited Company Rather Than Being An Individual Property Investor

Investing in property is a popular and potentially lucrative way to generate income in the UK. However, there are many factors to consider, including tax implications. One option that many property investors choose is to invest through a limited company, which can offer significant tax advantages but also has additional complexities and regulations. In this comprehensive guide, we will explore the benefits and considerations of investing in property through a limited company and compare it to investing as an individual.

What is a Limited Company?

A limited company is a separate legal entity from its owners, and is responsible for its own debts and obligations. The owners of a limited company are known as shareholders, and their liability is limited to the amount of money they have invested in the company. This means that if the company incurs debts or liabilities, the shareholders are not personally responsible, and their personal assets cannot be seized. This makes a limited company a more attractive option for property investors who want to minimize their personal exposure to risk.

Why Invest In Property As A Limited Company

Limited Companies Receive Lower Corporation Tax Rates

The first advantage of investing in property through a limited company is the lower corporation tax rates. In the UK, limited companies are taxed on their profits at the corporation tax rate, which is currently 19%. This is lower than the top rate of personal income tax, which stands at 45%. This means that if you invest in property through a limited company, you may be able to pay less tax on your profits compared to investing as an individual. This can significantly boost your returns on investment and increase your overall profitability. Bear in mind, however, should you wish to extract your post-tax profits from the company, you will also need to pay dividend tax.

Limited Companies Capital Gains Tax Exemptions

Capital gains tax is a tax levied on the profit made when you sell a property. However, if you invest through a limited company, capital gains tax is not applicable to the sale of a property – instead, your company will pay corporation tax on the gain, which is currently at a lower rate than capital gains tax. This allows you to retain more of your profits for reinvestment.

Tax-Deductible Expenses Through A Limited Company

When investing in property through a limited company, you may be able to claim a number of tax-deductible expenses. This includes mortgage interest (discussed further below), repair and maintenance costs, and legal and professional fees. These deductions can significantly reduce the amount of tax you pay, making it a more advantageous option. Additionally, you may be able to claim capital allowances or deduct expenses from the costs of running your property business, such as the cost of your home office, accounting fees, and any equipment you require, such as computing devices and stationery.

Mortgage Interest Deductibility For Limited Companies

In the UK, changes to mortgage interest deductibility for individuals in the buy-to-let sector were introduced in 2017. Prior to the change, landlords were able to deduct all of their mortgage interest costs from their taxable rental income. Under the new rules, the amount of mortgage interest that can be claimed as a tax deduction has been gradually reduced, and as of April 2020, landlords can only claim a basic rate reduction on their mortgage interest. This means that higher and additional rate taxpayers are no longer able to offset all of their mortgage interest costs against their taxable rental income. This change does not affect landlords investing via limited companies – this is cited as one of the main reasons for landlords opting to investment via a company in recent years.

Borrowing And Lending Opportunities For Limited Companies

Limited companies with larger portfolios have access to a wide range of lending and borrowing options. This means that they may be able to secure better mortgage rates for their portfolio as a whole, or even access funding that is not available to individuals. This can make it easier to acquire more properties, generate higher returns, and maximize the benefits of property investment. Limited companies care becoming increasingly attractive to lenders thus the amount of products available is constantly increasing.

Limited Companies Get Increased Liquidity

Investing in property through a limited company can also increase the liquidity of your investment. If you own property as an individual, you may need to sell the property to access your funds. However, if you own property through a limited company, you can sell shares in the company instead, which can provide a faster and more flexible way to access your funds. This can be particularly advantageous if you need to raise capital quickly, or if you want to diversify your investments without having to sell the property itself. Additionally, owning property through a limited company can make it easier to transfer ownership to family members or other individuals, as shares can be transferred without the need for complex legal processes.

Improved Credibility For Limited Company Property Investments

Investing in property through a limited company can also improve the credibility of your investment. A limited company structure can provide a professional image, which can be particularly attractive to tenants and lenders. Additionally, a limited company can make it easier to manage your properties, as the company can be run like a business, with clear accounting and reporting processes in place. This can make it easier to track your finances, manage your properties, and maximize your returns on investment.

Limited Companies Get Increased Complexity And Regulatory Requirements

However, it’s important to note that investing in property through a limited company also comes with increased complexity and regulatory requirements. Running a limited company requires significant time, effort, and expertise, and there are a number of legal and financial requirements that must be met. This can make it more challenging to manage your investment, and you may need to seek professional advice to ensure that you are fully compliant with all the relevant regulations. Additionally, there are also onerous rules that apply to limited companies, including the need to file annual accounts and reports, and corporation tax returns.

Investing In Property As An Individual Compared To A Limited Company

While investing in property through a limited company has many advantages, it’s also important to consider the alternative option of investing as an individual. Investing as an individual is a simpler and more straightforward option, and there are several key benefits to consider, including:

Personal Tax Rates For Individual Property Investors

As discussed earlier, the biggest difference between investing as an individual or a limited company is the tax rate paid on profits. In the UK, personal tax rates range from 0% to 45%. Depending on your current (and future) levels of income, it may therefore be more tax efficient to invest in your personal name, particularly if you have a lower income and plan to have a only small number of property investments investments.

Simplicity For Individual Property Investors

Investing in property as an individual is a simpler and more straightforward option compared to investing through a limited company. There are fewer legal and financial requirements to consider, and it can be easier to manage your investment and generate returns. Additionally, investing as an individual can make it easier to transfer ownership to family members or other individuals, as there is no need to transfer shares or navigate complex legal processes.

You Have More Flexibility As An Individual Property Investor

Investing in property as an individual can also offer greater flexibility compared to investing through a limited company. If you own property as an individual, you can sell the property at any time, or use it as security for a loan. This can provide a fast and flexible way to access your funds, and can be particularly beneficial if you need to raise capital quickly. Additionally, you may be able to claim capital gains tax exemptions if you own the property for a certain length of time, which can further boost your returns on investment.

The Final Verdict: Limited Company Property Investment Or Individual Property Investor

Investing in property can be a lucrative and rewarding way to generate income, but it’s important to consider all the options available. Investing through a limited company can offer significant tax advantages, but also comes with increased complexity and regulatory requirements. On the other hand, investing as an individual is a simpler and more straightforward option, particularly for smaller landlords. The decision to invest in property through a limited company or as an individual will depend on your individual circumstances, financial goals, and risk tolerance. It is always recommended to seek professional advice from a qualified accountant or solicitor to help.

a lucrative and rewarding way to generate income, but it’s important to consider all the options available. Investing through a limited company can offer significant tax advantages, but also comes with increased complexity and regulatory requirements. On the other hand, investing as an individual is a simpler and more straightforward option, particularly for smaller landlords. The decision to invest in property through a limited company or as an individual will depend on your individual circumstances, financial goals, and risk tolerance. It is always recommended to seek professional advice from a qualified accountant or solicitor to help.