Should you buy investment property through a limited company?

Wouldn’t it be nice if, for once, there was just one, straightforward route to purchasing investment property? Well, think twice as HMRC wants to give you the opportunity to flex your GCSE maths skills!

The current tax environment is prompting a rise in purchases through limited companies, up until recently the preserve of corporations or individuals (or groups of individuals) holding multiple properties as their form of business. This is because of the recent changes to the tax treatment of mortgage interest, generally a leveraged landlord’s highest expense. According to the explanation on Gov.UK, the policy objective of this tax change is “to make the tax system fairer,” although it doesn’t say fairer to whom. Certainly not landlords. However, buying property within a limited company structure means it’s treated as a business asset, rather than a personal asset, and is therefore subject to different rules regarding taxation, insurance, etc.

So let’s say you’ve got a lump sum available, you’ve decided it’s appropriate to include a buy-to-let property in your portfolio, and you’ve identified a suitable property with an attractive yield, it’s time to sharpen your pencil and work out exactly which route is right for you.

The main considerations are Stamp Duty Land Tax, Income Tax, Capital Gains Tax and Corporation Tax.

As an individual, you’ll pay SDLT at the buy-to-let/ additional home rate, tax on your income from the property and capital gains tax when you sell it. With regards to income tax, the phasing out of mortgage interest relief means that your “income” will seemingly go up. This could push you into a higher income tax bracket, and with a personal allowance of only £11,000 per year across all your UK income and a top rate of 45%, you could end up with a hefty tax bill at the end of the year. Capital Gains Tax for individuals is currently 28%.

On the other hand, corporations pay SDLT at a higher rate, even if it is your first property purchase by the company. However, “income” is treated as “profit”; the main rate of Corporation Tax is currently 19% (the tax year 2018/19). In 2020/21 it will be 17%. Capital Gains Tax for corporations is currently 20%. Dividends from the corporation are tax-free up to £5,000/year. Thereafter, beyond your personal income tax allowance of £11,000, dividends are taxed at 7.5%. So it’s important to establish whether you want to live off the income generated from your investment or let cash build up within the corporation.

Some people may be put off by the thought of setting up and maintaining a business, but it does make sense for top-rate tax payers, multi-property landlords, or family investors (as a way to mitigate Inheritance Tax), as the savings on Income and Capital Gains Taxes can outweigh the additional burden of SDLT. You can also assign other costs to the business as a way to reduce your personal tax burden.

With anything tax-related, and particularly property on which you pay tax before, during and after you own it, it’s best to get expert advice. You should be clear on just how much it’s going to cost you in taxes and other costs at any time throughout your ownership of the property. Our in-house specialists can guide you on the pros and cons of establishing your own limited company, and help with specialist mortgage advice.

About Author
Avatar photo
Hoxton Capital

How can we help you?

If you would like to speak to one of our advisers, please get in touch today.

Existing Client

Contact Us