What are the tax advantages of buying a property via a limited company? | WIS Mortgages
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3rd November 2023

What are the tax advantages of buying a property via a limited company?

Purchasing a property is a major decision for individuals and businesses alike. For many, the choice is not just about the property itself, but also the financial and tax implications associated with the purchase. Over recent years, there has been a growing trend among property investors to buy properties via a limited company rather than in their personal name. Why? The tax advantages are a significant driving factor. In this article, we delve into the tax benefits that can be reaped when buying property through a limited company.

The Tax Advantages of Buying a Property via a Limited Company

One of the biggest appeals of purchasing property via a limited company instead of as an individual is the tax benefits it offers. So to help you understand this setup, let's take a look at how these benefits manifest:

Corporation Tax Vs Income Tax

The most immediate advantage of buying property via a limited company is the difference in tax rates. Companies pay Corporation Tax on their profits, which has historically been lower than the higher rates of Income Tax that individuals might pay. This means that if the property generates a rental income, the net profit after expenses will typically be taxed at a more favourable rate inside a company.

Any after-tax profits can be kept within the company and reinvested into other properties or business ventures, allowing for a potentially faster accumulation of assets. So buying property as a limited company can improve the reinvestment potential from the initial purchase.

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Mortgage Interest Relief

The tax relief on mortgage interest has undergone significant changes. For individual landlords, the ability to deduct mortgage interest from rental income is being phased out, and they'll receive only a basic rate tax reduction. However, for properties owned by a limited company, mortgage interest is treated as a business expense. This means that it can be fully deducted from the rental income before tax, leading to potential savings.

Potential for Multiple Shareholders

With a limited company, it's possible to have multiple shareholders who can invest in a property. This means that if you have partners or family members with lower income, you can allocate dividends to utilise their lower tax rates. The use of shares can also be beneficial for estate planning purposes, allowing you to pass on assets in a tax-efficient manner.

Capital Gains Tax (CGT) Advantages

When selling a property that isn't your home, any increase in value is potentially subject to Capital Gains Tax. Although individuals get an annual CGT exemption, companies can benefit from an indexation allowance, which increases the cost of the property for tax purposes by the rate of inflation during the ownership period, reducing the potential gain.

Moreover, if the company plans to reinvest the proceeds from a property sale into another business venture or property, it can do so without immediately triggering a CGT liability for shareholders.

Points to Consider

While there are clear tax advantages, it's essential to remember that buying property via a limited company also comes with potential disadvantages. There could be higher mortgage rates, added complexities of running a company, and additional administrative responsibilities.

Another consideration when buying a property through a limited company is the risk of a Benefit in Kind (BIK). If you're an employee of the limited company, then purchasing the property purchase could be deemed as a fringe benefit or notional pay by HMRC. If this occurs, then it will be treated as taxable income. You can avoid this by paying full commercial rent to the business.

Moreover, every individual's financial situation is unique. Hence, before making a decision, it's important to consult with a mortgage adviser to ensure that buying property via a limited company aligns with your broader financial goals and circumstances. By doing so, you'll be better informed and have an expert by your side to navigate you through the potential complexities involved.

Buying Property via a Limited Company Offers Many Benefits

The tax landscape for property investors has shifted in recent years, making the option of purchasing through a limited company increasingly appealing for many. With potential benefits ranging from lower tax rates on profits to more favourable treatments of mortgage interest and capital gains, the allure is undeniable.

If you're interested in purchasing a property via a limited company but would like to know more, then our team at WIS Mortgages can help. Our team are here to help you understand the best approach to investing in property. So get in touch with us today to get started.

Frequently Asked Questions

Q. Should I buy a property through my limited company?

A. The answer to this question really depends on your own circumstances. For example, if you'll be using mortgages to purchase properties, then it might be worthwhile doing so by forming a company. This will allow you to claim 100 % of your mortgage interests against rental income as an operating expense.

Q. Can I transfer property I already own into my limited company?

A. Although you can do this, it might not be the best move. Legal ownership of the property would change over to the company, so you'll be selling the property to the business. This will usually mean that the purchase will be liable for Stamp Duty Land Tax (in England and Northern Ireland).

Q. Can I sell my property to my limited company for free?

A. Yes, but again it's not advisable to do so. If you do sell it for free, you'd still have to pay stamp duty and Capital Gains Tax on the difference between the price you bought it for and what you sold it at.

As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments. The Financial conduct authority does not regulate taxation advice or commercial buy to lets.

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