Should I put my investment property into a limited company?

4 May 2023

Darren Hughes

Property Owners, Building & Construction, Accounting & Compliance, Building a Business, Property Investors & Developers

This is a common question we are often asked from people looking to venture into property development or building up a buy to let portfolio.

And the answer really is – it depends!

Setting up a limited company for property as part of an overall tax and investment strategy (also known as a Special Purpose Vehicle or SPV) can be very efficient in the right circumstances.

Is “going limited” right for me?

For new purchases of investment property an SPV is always worth at least considering.

However you would need to check that your lender is happy with the structure and that the interest rates are competitive.

We would normally only recommend corporate ownership where there are at least three rental properties or plans for a minimum of three properties in the future. That way it is viable running a limited company even with the increased administrative costs.

Other things to consider include:

How long you intend to keep the property
Your personal taxable income
Availability of your dividend allowance
Stamp duty implications
Capital gains tax if the property is already owned
Early redemption charges if there is a mortgage on the property.

What are the benefits of putting property into a limited company?

By owning investment properties within a separate legal entity, like a limited company, rental profits generated will be sheltered in this separate entity and not taxed on you personally.

Corporation tax vs personal tax

Rental profits generated within the company will be taxed at 19% for profits under £50,000. Thanks to the new marginal rate rules, profit exceeding this amount this will effectively be taxed at 26.5% up until £250,000. Profits above £250,000 will be taxed at 25%.

Compare this with income tax rates of 40/45% plus the ability to claim full tax relief on your lending costs which is no longer available for residential lets, and the company route seems immediately more favourable.

Tax Savings

As the portfolio grows there will be other tax saving opportunities too. For example, the business will be able to pay for expenses on behalf of the directors. This could include life insurances, annual events (Christmas parties), employer pension contributions, tax efficient company cars, to name but a few.

Extracting Money

There will also be the option of extracting monies to yourself/partners/spouses/children over the age of 18. The main ways of extracting money out of a company are:

salary,
interest paid on monies loaned to the company,
dividends and
loans taken from company funds, although this would only be advisable in the short term.

Tax planning

Careful tax planning could reduce your tax burden significantly, are there allowances that your family are not utilising? Examples include:

personal allowances
interest allowances
savings allowances
dividend allowances
or unused basic rate tax band

Keeping it in the family

Companies are also a useful way to transfer all or some of your company shares to your loved ones.

This could be done either directly or in some cases by using a family discretionary trust.

What are the negatives?

First and foremost, many people underestimate how much time property investment can take up and setting up and running a limited company will inevitably incur additional costs.

There’s also the risk.

Whilst property prices have risen consistently over the long-term things can still go pear shaped with bad timing or a poor property investment.

The cash tied up in property investment is also more difficult to access quickly and can be very dependent on prolonged sales processes.

If you own several properties in your own name and are considering transferring them into a limited company, it’s important to assess the stamp duty land tax liabilities and often capital gains tax that you will incur. There could be potential exemptions if you run this as a business and you spend a minimum of 20 hours per week working in the business, however in all cases we would recommend seeking professional advice.

Overall

Property is a popular choice for investment and normally yields good return on capital and over time – property price trends always seem to increase so you get capital appreciation too!

When considering how best to structure your property investment portfolio it’s important to seek professional advice and examine your options carefully.

Making informed decisions and having the right structure in place for your business is often the difference between success and failure.

If you would like to find out more, please contact Darren Hughes by email or call 01634 731390.