Buying property through a company: the entrepreneur’s guide

Before changes to the treatment of mortgages introduced in the 2015 Budget, it was relatively rare for people to buy properties through a company. For most people there was simply no need.

Now, the picture is different. As of 2017 you’re no longer be able to deduct mortgage interest costs from taxable profits, if your property is owned by an individual. If it’s owned by a company, however, the old rules still apply.

When it comes to buying property through a limited company, there are plenty of factors to consider. Here are a few of the most important.

Are you buying to trade or invest?

Traders buy properties to make value added investments and then sell them on for profit. Investors, on the other hand, buy properties to collect rent and watch their value creep up over the years.

If you’re a trader, you’ll almost always be best buying through a limited company.

Why? Because if you trade properties as a limited company, you’ll pay Corporation Tax which at 19% is a hell of a lot less than the 40% higher rate taxpayers pay.

For investors, the picture is a little more complicated…

Investors might want to buy through a limited company for the following reasons:

Better tax treatment of profits

If you own a property in your name, any rental profits will be added to your other earnings and taxed as profit. The benefit of holding the profits in a company is that they’ll be taxed as Corporation Tax, which as we said is far lower than higher rate income tax brackets.

You’ll still be taxed on the dividends when you take profits out of the company – but if you’re flexible you can minimise the amount of tax you pay.

One way of doing this would be to time your dividend payouts for maximum tax-efficiency. Otherwise, you could distribute them to family members who are only basic rate taxpayers. By speaking with an expert, you’ll find the right option for you.

Tax treatment of mortgage interest

From April 2020, mortgage interest will no longer be an allowable expense for individual property investors. This allowance will continue for companies that hold property. Basically, this will mean that if you are a higher rate taxpayer and use mortgages to buy property, your tax bill will be higher if you buy properties in your own name. Savings can be made by buying through a limited company.

However, there can be downsides to using a limited company for investors…

Lack of mortgage availability

This is less of a ‘biggie’ than it used to be. Mortgages for companies used to be limited, expensive and had low borrowing limits.

Although there are still fewer products on the market, this is changing rapidly. More and more lenders are offering products for limited companies.

As with a normal mortgage, you’ll need to give a personal guarantee and your own finances will be scrutinised. The rates and fees are likely to be higher, but nowadays there are plenty of competitive products on offer.

Extra cost and hassle

Buying a property through a company means a lot more paperwork. Your accountancy costs will be higher, because your properties will be associated with your company accounts. All in all, things can be just that bit more difficult when using a limited company.

Before buying a property through a limited company, do your research. We’re sure you know that the likes of mortgages and property are not to be taken lightly. Speak to your accountant and make sure you are dead certain that using a company is the best option for you.