Setting up a limited company is a complex matter. If you want to form one for property investment, then you should consider all the factors. Make sure you know what you are getting into and that this is the right choice for your business. You will encounter numerous issues, but also benefit from the advantages of running a limited company. This guide will cover the pros and cons of buying property through a limited company.

First, let’s discuss the definition of a limited company. Then, we can move on to the factors that you should consider.

What is a Limited Company?

A business structure with a separate financial and legal entity from the people running it is called a limited company. The people running it are the company’s directors. The company has a limited liability, which is a major benefit. This means that in case your business fails, your only liability is for the face value of your share. Your personal assets are under protection.

A Limited Company has the following:

• Directors (A minimum of one).
• Own bank account.
• Registration at Companies House.

Furthermore, it pays its own kind of tax. You can buy or sell it in the form of shares.

Why Form a Limited Company?

As mentioned above, a limited company has limited liability. This can benefit you greatly. You cannot lose more than the face value of your share in the company, as it is a separate legal entity. As a company director, you do not need to worry about your personal assets. If you are a sole trader, there is no separation between your personal finances and the finances of the business. As a result, if someone sues your business or it fails, then your personal assets are at risk. Therefore, forming a limited company is less risky. Thus, these are some factors to consider before buying property through a limited company.

How to Set Up a Limited Company in 7 Steps

You can set up your limited company by following these steps:

1. Verify that it is the Right Choice

Look at the pros and cons of forming a limited company before you set it up. You must ensure that this is the right structure for your business.

2. Decide the Name of the Company

You must choose a name that is available. A name that is unique and not like any existing company. Moreover, the name cannot make any false implications. For example, a body’s approval or regulation when it does not exist. Also, it must not offend. 

3. Assign One Director at the Least

You must appoint at least one director of your company. Here it is you. However, you can have several directors. Directors must collectively make decisions for the company. Also, they need to follow all the rules. It is their responsibility to file the accounts and make sure that the company pays the corporation tax it owes. Then, what are the pros and cons of buying property through a limited company?

Additionally, you can appoint a company secretary if you want. It is not compulsory. Their job is to make sure that the decisions of the directors are implemented. Moreover, they must see to it that the company follows regulatory requirements. They must also handle other administration responsibilities.

4. Appoint Shareholders

Your company needs to have a minimum of one shareholder. You can appoint yourself, the director, as a shareholder. The division of shares amongst the directors is not necessarily equal. At shareholder meetings, shareholders vote on decisions. One share equals to one vote. This means that more influence comes from majority shareholders. If a shareholder has more than 25pc of the share, then they are a person of significant control (PSC).

5. Prepare the Necessary Documents

There are specific documents that recognise the company’s formation and state how it is to run. Your company must have the following documents:

• The memorandum of association

All initial shareholders sign this legal statement. It states that they all agree to form this company together.

• The articles of association

This document contains the rules on how to run the company. The directors, shareholders, and company secretary must all agree with it. You can write your own articles of association or use a model.

6. Check What Records You Must Keep

You must keep records of all the important details about the company and its PSCs. For example, accounting records. It is necessary to keep the records for at least six years. Therefore, you should consider all this before buying property through a limited company.

7. Register Your Company with Companies House

The last step is to register your company along with its official address at Companies House. Please note that you must select the right SIC code as it specifies your business’ nature. You can also register for corporation tax.

How to Register a Limited Company with Companies House

There are two ways to register your company with Companies House. You can do so by post using form IN01 or online. In case you decide to not use the term ‘limited’ in your company name, you need to register via post. Within 24 hours of receiving your application, your company will get a registration. This is the timeframe for online applications. Whereas for postal registrations it takes up to 10 days.

After you register your company, you will receive a ten-digit Unique Taxpayer Reference (UTR) within a few days through post. You must keep it safe as you will need it. Additionally, you will get a ‘certification of incorporation’. This is a confirmation that your company exists legally. It also states the date of formation and the company number.

Advantages of Buying Property Through a Limited Company

If you decide to purchase properties through your company, then you can benefit from the following:

Significant Savings are Possible When Paying Corporation Tax

Investors choose to form limited companies mostly because of how income is taxed in a company.

Individual investors need to pay income tax. This ranges from 20 to 45%. Whereas Corporation Tax applies to the profits held within a company.

Income tax rates are far higher than Corporation Tax. As of right now, Corporation Tax is at a flat rate of 25%. There was an increase in April 2023 from 19%.

Basic-rate taxpayers cannot make substantial savings this way. If you are in the higher tax bracket, you can save a significant amount of money when paying corporation tax.

You can Benefit from More Mortgage Tax Relief 

As a property investor, you undoubtedly know that buy-to-let mortgages are expensive.

Monthly interest payments and tax eat away your rental profits. In the past, property owners could reduce their tax bill. They would deduct mortgage costs from their rental income.

However, this all changed in April 2020. Now, individuals only get a tax credit based that is based on 20% of their monthly payments.

But tax changes in April 2020 meant this was no longer the case, with individuals now given a tax credit based on just 20% of their monthly mortgage interest payments.

Which is no doubt a bummer. There is no need to worry, as this does not apply to limited companies.

Limited companies have the advantage of treating mortgage interest as a business expense. As a result, they benefit from full tax relief against their rental income. Thus, you should know all the advantages of buying property through a limited company.

It Is Easier to Gift Property with Reduced Inheritance Tax 

Limited companies are a practical choice for those whose end goals is to provide an asset to their family members. You get various opportunities to mitigate inheritance by holding property in a company. There are several ways to do this. For example, using shares and trust structures. Also, any other methods that individual property owners cannot access.

It is best to contact an expert advisor if you want to form a limited company for property investment. They will navigate you through the process and check if it is the right choice for you.

After-Tax Savings, it is Easier to Reinvest Funds

You may need to reinvest your income if you decide to buy a second rental property and own multiple assets.

Although individual property owners need to pay income tax on all profits, the same does not apply to a company.

The reason behind this is that you can keep your profits after corporation tax within your company. Then use them to reinvest directly and avoid making any further tax payments.

Disadvantages of Buying Property Through a Limited Company

When purchasing properties through your limited company, you face the following drawbacks:

It is Difficult to Take Money Out of the Company

Although you can save a lot of money by forming a limited company, issues exist when it comes to getting your income. You cannot pocket the cash and call it a day. Either you receive it as a salary or a dividend.

Nevertheless, there are issues with both methods that you should consider:

1. Only the first £2,000 you take is tax free when it comes to the dividend solution. You must pay tax on anything beyond this threshold. It has a basic rate of 7.5%, while the higher rate is 38.1%. It is necessary to pay this after the corporation tax. Therefore, if your income does not fall under the higher income rate, there is less saving potential.
2. Like every employer, you need to operate PAYE and provide national insurance contributions when taking money as a salary. This sounds ideal. However, that is not the case. Sometimes, the national insurance contributions are more expensive than the higher tax rates on the dividends route.

So, what is the conclusion? Even if you can save money on taxes in certain areas, you will end up spending money on others. Therefore, you must check your situation to find out if it is worthwhile or not. It is important to understand the cons of Thus, you should know all the disadvantages of buying property through a limited company.

There is no CGT Allowance

Although there are quite a few advantages of forming a limited company, it is not all beneficial. Individual property owners can access the Capital Gains Tax allowance, whereas a limited company does not have this access. It is a substantial disadvantage for investors. This is because selling your property is an important part of property investment. Although this does not make it a deal-breaker, it does decrease the profit.

It is Difficult to Put Property into a Limited Company

You will face issues if you already have a property portfolio and decide to put your buy to let property in a company. Unfortunately, as a property investor, you cannot transfer your residential property to a company. Instead, it is more complex. Your company must purchase it from you. It is important to know the downsides of buying property through a limited company.

This is bad news. You will need to bear all the anticipated expenses of purchasing and selling a property. These include the following:

• Stamp Duty Land Tax (SDLT)
• Early repayment charges for your mortgage.
• Capital gains tax.
• Legal fees.

Even though you are saving money from paying income tax, you still need to pay costs in another way. Now, the question is that is this worthwhile to do? This depends on the number of properties you already have. In case you own only one or two properties, the expenses are not worth it.

It is a tax-efficient solution for those who own 10 rental properties. This is because of the way tax treatment applies to a company. It is ideal to seek expert advice to find out if it is right for you.

Finding Mortgages is Challenging

In the past, this was more of a problem. However, the issue remains with mortgage availability when it comes to limited companies. Before, there was pressure on companies to find ideal mortgages. These mortgages were difficult to find. They had a lower borrowing limit and higher monthly costs. Now, more and more investors are choosing to form a limited company. Therefore, lenders are supplying mortgages. In comparison to an individual investor, you will find fewer available mortgages even today. The same checks apply. You must give a personal guarantee and they will scrutinise your finances. Make sure you understand the drawbacks of buying property through a limited company.

It is Expensive and Time-Consuming

If you want a completely hands-off investment that requires less work, then setting up a limited company is not for you. You need to put in the effort and time to succeed, just like any other business. This is inclusive of filing annual company accounts and paperwork. Which is expensive with accountancy costs.

Although this is not a major issue, you should consider it when setting up a limited company for property investment.

Advantages	Disadvantages
Saving money when paying corporation tax.	Difficult to take out money from the company.
More mortgage tax relief.	No CGT allowance.
Easier to reinvest funds.	Difficult to find mortgages.

 

Important Question to Ask Yourself Before Buying Property Through a Limited Company

It is essential to ask yourself the following questions before you make the decision:

How Much Income Will You Generate?

You can benefit from the lower corporation tax rates if your income falls in the higher tax bands.

Are you Already a Property Owner?

Saving money in the long run is possible if you own several properties. However, if you only own one or two, then it is not worth it in the end.

Is a Mortgage Necessary for You?

If the answer is yes, then you should go for it. You have the advantage of claiming 100% of your mortgage interests against your income as an expense. As a result, you save money.

Conclusion

To conclude, there are a lot of factors to consider before setting up a limited company for property investment. Before you decide to do so, it is best to seek professional advice to find out if it is the right choice for you. Even though there are plenty of benefits in forming a limited company, it comes with its fair share of drawbacks. As a property investor, you should understand the tax implications of purchasing through a limited company.

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