Investing through a limited company has become increasingly popular among property investors in recent years.
So far this year 74% of new buy-to-let purchases were made via a company in order to reduce their tax bills.
Getting the right legal structure set up when first investing in property may seem like a daunting process, but in the long run, it can save you tens of thousands of pounds in tax, which is why more and more investors these days are opting for Limited Company structures for their property investments.
Over the past few years, more and more property investors have opted to make their investments through a limited company rather than in their personal names.
The reason for this stems back a few years to the 2015 summer budget when George Osborne, the Chancellor of the Exchequer at the time, chose to clamp down on ‘non-professional’ landlords by hitting them with tax changes and restricting the limit of relief available on their mortgage interest payments. It was also seen as a way of forcing out the amateur landlords, and potentially making more properties available for first-time buyers, thus assisting with the massive housing crisis and undersupply in the UK.
Understanding Property Investment Through a Limited Company
Here are some key things to know about investing through a limited company:
- A limited company is a separate legal entity from its owners. This means that the company can own property in its own name, rather than in the name of an individual.
- When investing in property through a limited company, the company will typically take out a mortgage to finance the purchase. This means that the company, rather than the individual investors, is responsible for repaying the mortgage.
- One advantage of investing in property through a limited company is that it can offer tax benefits.
- Another advantage is that investing through a limited company can offer more protection for the investors. If the property is owned by the company, rather than by the individuals, then the investors’ personal assets are less likely to be at risk if something goes wrong with the investment.
- However, investing in property through a limited company also has some potential drawbacks. For example, the process of setting up and running a company can be more complex and time-consuming than investing as an individual.
- Additionally, the costs of setting up and running a company can be higher than investing as an individual. For example, there may be legal and accounting fees to pay, as well as ongoing costs such as company registration fees and annual accounts.
Overall, investing in property through a limited company can offer advantages in terms of tax and protection, but it is important to carefully weigh the pros and cons before deciding whether this approach is right for you.
Benefits of Investing in Property Through a Limited Company
Investing in property through a limited company can offer some tax advantages such as being able to pay corporation tax rather than income tax which can make a big difference to the annual bill for investors who sit in the higher tax brackets.
Another tax advantage of investing in property through a limited company is that capital gains tax (CGT) is lower. Limited companies are subject to corporation tax on their profits, which is currently lower than the higher rate of CGT paid by individuals. This can result in significant savings when selling a property.
Of course, limited companies can also treat mortgage interest as a business expense. It’s also usually easier to reinvest funds in a company structure and there can be opportunities to mitigate inheritance tax too.
*It is strongly advised you seek professional tax advice regarding investing through a limited company structure as we are not qualified to give tax advice.
Investing in property through a limited company provides limited liability. Limited liability means that the shareholders of the company are not personally liable for any debts or obligations of the company. This means that if the company were to go bankrupt or become insolvent, the shareholders’ personal assets would not be at risk.
Limited liability can provide peace of mind for investors, especially those who are investing in multiple properties. It can also sometimes make it easier to obtain financing, as lenders may be more willing to lend to a limited company with limited liability than to an individual with personal liability.
Drawbacks of Investing in Property Through a Limited Company
Complexity of Management
Investing in property through a limited company can be more complex than investing as an individual. The management of the company and its finances must be done carefully to ensure compliance with legal and tax requirements. This can be time-consuming and may require professional assistance, which can add to the costs of investing.
Limited companies must also adhere to strict regulations regarding record-keeping, reporting, and filing of accounts. Failure to comply with these requirements can result in penalties and fines from HMRC.
Higher Accounting Costs
Investing in property through a limited company can result in higher accounting costs. The company must file annual accounts and corporation tax returns, which can be more expensive than personal tax returns. In addition, the company may require the services of a qualified accountant to ensure compliance with tax regulations and to manage the company’s finances.
Furthermore, limited companies may also be subject to additional costs such as company formation fees, legal fees, and ongoing administrative costs.
Setting Up a Limited Company for Property Investment
Investing in property through a limited company can offer several benefits, including tax advantages and limited liability protection. Setting up a limited company for property investment involves a few key steps.
Choosing a Company Name
The first step in setting up a limited company for property investment is choosing a company name. The name must be unique and not already in use by another company. It should also reflect the nature of the business. Once a name is chosen, it can be checked for availability on the Companies House website.
Registering the Company
After choosing a name, the next step is to register the limited company with Companies House. This involves submitting several documents, including articles of association, a memorandum of association, and a registration fee. It is advisable to seek professional advice when registering a limited company to ensure all legal requirements are met.
Opening a Bank Account
Once the company is registered, it is important to open a separate bank account for the company’s finances. This helps to keep personal and business finances separate and makes accounting and tax reporting easier. The company can choose from a range of banking options, including high street banks and online banks.
In summary, setting up a limited company for property investment involves choosing a unique company name, registering the company with Companies House, and opening a separate bank account. Seeking professional advice is recommended to ensure all legal requirements are met.
Legal and Regulatory Considerations
Understanding Property Laws
Investing in property through a limited company requires a thorough understanding of property laws. Property laws are complex and vary depending on the type of property and location. Investors should be aware of the legal requirements and regulations surrounding property ownership, such as obtaining planning permission, building regulations, and complying with health and safety standards. Failure to comply with these regulations can result in legal action, fines, and even imprisonment.
Investors should also be aware of the different types of property ownership and their implications. For example, freehold ownership grants full ownership of the property and the land it sits on, while leasehold ownership only grants ownership of the property for a limited period of time. Investors should understand the legal implications and restrictions of each type of ownership before investing in property.
Compliance with Company Laws
Investing in property through a limited company also requires compliance with company laws. Investors should ensure that their company is registered with Companies House and that they comply with the Companies Act 2006. This includes maintaining accurate records, filing annual accounts and returns, and complying with tax laws.
Investors should also be aware of the legal obligations and responsibilities of company directors. Directors have a duty to act in the best interests of the company and its shareholders, and failure to do so can result in legal action and disqualification. Investors should ensure that they understand their legal obligations as directors and seek professional advice if necessary.
Investing in property through a limited company can provide various tax benefits, but it requires securing financing. Limited companies can obtain mortgages from lenders, but interest rates may be higher than those for personal mortgages. Lenders may require a personal guarantee from the directors or shareholders of the company, and the company’s creditworthiness will be evaluated.
Managing Cash Flow
Managing cash flow is a critical aspect of investing in property through a limited company. The company’s income will come from rent, which must cover the mortgage payments, taxes, maintenance, and other expenses. The company should have a detailed budget and financial plan to ensure that it has sufficient cash flow to cover these expenses and any unexpected costs.
The company should also have a reserve fund for emergencies and repairs. It is essential to keep accurate records of income and expenses and to monitor cash flow regularly. The directors should review the financial statements and budget regularly to identify any issues and make necessary adjustments.
When investing in property through a limited company, it is important to have a clear exit strategy in place. This will help ensure that you are able to exit the investment in a way that maximizes your returns and minimizes your risks. Here are some common exit strategies for property investors:
Selling the company
Selling a property investment company with the properties remaining within the structure is often a preferred method for transacting as the buyer will not pay Stamp Duty Land Tax in the same way they would if purchasing a property as an individual.
Selling the Property
One of the most common exit strategies for property investors is to sell the property. This can be done in a number of ways, including selling the property to another investor or selling it on the open market. If you choose to sell the property, you will need to consider factors such as the current market conditions, the property’s location and condition, and your own financial goals.
Dissolving the Company
Another option for exiting a property investment made through a limited company is to dissolve the company. This can be done by selling the company’s assets and distributing the proceeds to shareholders, or by liquidating the company’s assets and distributing the proceeds to creditors. Before dissolving the company, you will need to consider factors such as the tax implications, the company’s outstanding debts and liabilities, and the impact on your personal finances.
It is important to note that each exit strategy has its own advantages and disadvantages and that the best option will depend on your specific circumstances and goals.
Get In Touch
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