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Written by: James Needham, Director

Are you a business owner looking to purchase a property or an individual aiming to reduce costs associated with property acquisition? Rather than personal ownership, you might be better off doing so through your existing or newly formed limited company due to potential cost savings and other associated benefits.

The number of landlords buying property through a limited company doubled between 2017 and 2022, as more and more cottoned onto the potential advantages. 

But is it truly better to buy a property through a limited company? Allow us to reveal this and much more, from the tax implications of buying a house through a limited company to the legal and financial considerations.

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buying property through a limited company guide

How can you buy a property through a limited company?

To purchase a property through a limited company, you need to have set up a registered limited company. This could be a special-purpose vehicle (SPV) created specifically for property investment.

Limited companies can secure commercial mortgages to purchase properties. However, the terms and conditions usually differ from personal mortgages. Lenders will assess things like the company’s financial stability and the property’s potential rental income when deciding to offer you a commercial mortgage or not.

It’s also important to think about the tax considerations. For example, the rules for Stamp Duty Land Tax (SDLD) are different for properties purchased by companies. We’ll look at the tax implications of buying a property through a limited company in more detail later.

Buying property as a limited company: What we like

  • Tax efficiency: Limited companies are subject to corporate tax rates, which can be more favourable than personal income tax rates. Here in the UK, the main corporate tax rate is just 25%, compared to 40% for higher earners and 45% for those on the additional rate. 
  • Tax relief: Interest on mortgages used to purchase properties can often be fully deducted as a business expense, providing significant tax savings compared to personal ownership.
  • Asset protection: One of the main benefits of a limited company is the limited liability of its shareholders. Personal assets are generally protected from business-related liabilities, reducing the investor’s personal financial risk.
  • Estate planning: Transferring shares of a limited company is a more tax-efficient way to manage inheritance and estate planning compared to transferring individual properties. This is because company owners can apply for Business Relief and avoid large amounts of inheritance tax.
  • Flexibility in ownership: What’s more, shares of a limited company are easier to transfer than the ownership of individual properties. This flexibility can be advantageous when restructuring ownership or bringing in new investors.
  • Professionalism: Holding property in a limited company can be perceived as more professional, which may be beneficial when dealing with tenants, partners, or other business stakeholders.
  • Separation of assets: Buying a property as a limited company helps maintain a clear separation between personal and business assets, making financial management and reporting more straightforward.
  • Access to commercial mortgages: Limited companies may have access to commercial lending options, providing flexibility in financing and potentially better terms than residential mortgages.
  • Continuity and succession planning: A limited company has perpetual existence, meaning it can continue its operations even if ownership changes, providing stability and facilitating long-term planning.

Buying property as a limited company: Areas of consideration

  • Higher initial costs: Setting up and maintaining a limited company involves administrative and legal costs, such as registration fees, accounting fees, and ongoing compliance expenses. These expenditures can be higher compared to personal property ownership.
  • Higher mortgage deposits: While mortgage rates for limited companies are often higher than rates for personal mortgages, the ability to expense interest negates this. That said, mortgage deposits for limited companies tend to be significantly higher — generally between 20-25% of the property’s value, in comparison to roughly 10-15% for individuals.
  • Complexity and administration: Operating a limited company involves additional administrative responsibilities, including filing annual accounts, maintaining statutory records, and complying with corporate governance regulations. This can be more complex than managing personal property ownership.
  • Reduced privacy: Limited companies are subject to public disclosure requirements. Information about the company, including its financial statements, is accessible to the public, reducing the privacy involved compared to personal ownership.
  • Higher tax costs: Although there are tax benefits to buying a property through a limited company, there are also extra tax costs to consider. For example, as well as the standard rate of stamp duty land tax paid when buying a property, limited companies also pay an extra 3% surcharge. Meanwhile, any profits made from the property, either as dividends or through other means, are subject to capital gains tax, although there is tax relief on this.
  • Limited mortgage options: Again, while there are certainly benefits to commercial mortgages over residential ones, limited companies typically have fewer mortgage options compared to individuals. This limitation may affect the flexibility of financing.
  • Personal borrowing restrictions: If an individual plans to purchase a property through a limited company, they might face personal borrowing restrictions as lenders consider the individual’s overall financial commitments, including those related to the limited company.
  • Exit costs: Dissolving a limited company or transferring property out of the company may incur additional costs and taxes. Planning for exit strategies is essential to minimise potential financial impacts.

What you need to know when buying a property through a limited company

  • The tax implications: Be sure to understand the corporate tax implications of buying a property through a limited company. You should also think more broadly about how the purchase aligns with your overall tax strategy.
  • Your mortgage options: Explore mortgage options for limited companies, comparing interest rates, terms, and conditions offered by different lenders. Consider consulting a mortgage broker with experience in commercial lending.
  • The legal structure: Choose an appropriate legal structure for the limited company. As touched upon earlier, SPVs are commonly used for property investment to ring-fence the assets and liabilities.
  • The initial and ongoing costs: Calculate the initial setup costs, ongoing administrative expenses, and compliance costs associated with running a limited company, and factor these into your financial projections.
  • Privacy and disclosure: Understand the level of privacy and disclosure associated with operating a limited company. Financial statements and other company information may be publicly accessible.
  • Ownership structure: Decide on the ownership structure within the company. Determine the distribution of shares among shareholders and how decisions will be made regarding the property.
  • Financial structure: Consider the financial structure of the company. Evaluate the mix of equity and debt financing, and assess how this aligns with your financial goals and risk tolerance.
  • Exit strategies: Plan for potential exit strategies, including how you might sell the property, dissolve the company, or transfer ownership. Be sure to understand the associated tax implications of each scenario too.
  • Understand commercial lending requirements: Make yourself aware of the specific requirements of commercial lending for properties held by limited companies. For example, this may include demonstrating the property’s income-generating potential.
  • Company governance: Establish clear governance structures within the company. Define the roles and responsibilities of directors and shareholders, and ensure compliance with corporate governance regulations.
  • Perform due diligence on the property: Conduct thorough due diligence on the property itself. Assess its condition, potential for rental income, and any legal issues that might affect its value or use.
  • Risk management: Assess the risks associated with property ownership, such as market fluctuations, vacancy rates, and potential repairs. Consider how these risks align with your risk tolerance and overall investment strategy.
  • Look at market trends: Stay informed about market trends and conditions in the location where you plan to purchase the property. Economic, demographic, and real estate market factors can impact property values, for one. 
  • Get professional advice: Seek professional advice from legal, tax, and financial experts. It’s also a good idea to consult with professionals who specialise in limited company structures and property investment to ensure compliance and optimise your financial position.

Buying property through a limited company with Alesco

Leveraging our extensive expertise in the realm of property investment, we can help you put together a prosperous portfolio. Beyond providing access to a diverse array of properties, we offer support in essential aspects such as conducting due diligence and navigating the acquisition process. Our dedicated team is ready to guide you through every step.

Contact us to find out more or to begin investing today.

Written by: James Needham

Director

Experienced Team Lead with a demonstrated history of working in the real estate industry.

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