Following changes to mortgage interest relief and potential tax savings, many property investors are choosing to buy property in a limited company rather than in a personal name. We have listed some of the pros and cons of buying in a limited company and how it works.

What is an SPV

A company specifically formed for buy to let or investment purposes is known as a Special Purpose Vehicle (SPV). An SPV does not conduct any trading activity as it is used for rent to come in and expenses to go out. If you have a primary activity other than owning a property e.g. you buy renovate and sell properties, it will be seen as a trading limited company.

Buy to let lenders tend to require limited companies to be an SPV as it means they won’t have to consider and underwrite the risks associated with the trading activities of a business.


Pros of buying property in a limited company

You can take a salary

As the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income from the business in the form of dividends. This will allow you to pay less national insurance as limited company dividends are not subject to national insurance contributions. The first £2,000 you receive in dividends from investments is tax-free (known as your dividend allowance).

Improved tax efficiencies

Using a limited company to buy a property can offer tax benefits especially if you’re a higher rate tax payer. When a property is owned in your name, the rental profit is added to your other income and taxed as income tax. However, rental profits on properties in a limited company are taxed via corporation tax. The current corporation tax rate is 19% whilst individual income tax rates can be as high as 45%.

Future planning

It is easier to transfer property owned in a limited company to another owner compared to transferring a personally owned property to another owner. As the property does not actually change owners, you could be exempt from stamp duty, inheritance tax and capital gains tax. This is useful for investors considering transferring to family in the future.

Mortgage relief

A new buy to let system was phased in at the start of the 2017-18 tax year. From April 2020, tax relief for finance costs (including mortgage interest payments) has been restricted to the basic rate of income tax, currently 20%. The tax on landlords income is then charged in accordance with your income tax banding (20% for basic rate taxpayers, 40% for a higher rate, and 45% for additional rate). In layman’s terms, this means that all rental income is taxed at a landlord’s highest marginal income tax rate. The only concession is the 20% tax credit on mortgage finance costs.

For companies holding property, however, mortgage interest payments can still be claimed as an expense. You can read more about the mortgage relief changes here.

Less stringent stress check

Lenders assess a potential borrowers suitability by performing a ‘stress test’. The stress test determines if a borrower can afford their mortgage. The test also assesses if the borrower can afford their repayments if interest rates were to rise.

In 2017, the Bank of England’s Prudential Regulation Authority (PRA), insisted that when giving mortgages, the rent must cover at least 145% (interest cover ratio) of the mortgage payment at an interest rate of 5.5%. However, for limited company mortgages, the interest cover ratio tends to be lower at 125%.

Example

  • If a borrower takes out a mortgage of £200,000 then the monthly interest payment based on a rate of 5.5% will be £916 per month.  
  • If taking out a personal mortgage, lenders will likely want the rent to be 145% of £916 = £1383 per month. 
  • Whereas a limited company mortgage will tend to need the rent to cover 125% of £916 = £1145 per month.
  • NB. Some lenders allow for ‘top slicing’. This is when a lender allows a borrower’s personal disposable income to make up the difference between the actual rental income and the stress tested rental income amount required by the lender.

Cons of buying in a limited company

You still have to pay stamp duty 

If the property is not purchased by an individual (e.g. the buyer is a company rather than a person), the additional stamp duty charge will apply regardless of how many properties the company owns.

No capital gains tax allowance 

A property sold in a limited company will not benefit from the capital gains tax allowance. (£12,300). Companies are liable to pay tax on all gains whereas a property in an individual’s name will only pay tax on the gain above their tax free allowance. 

Dividend taxation 

If you take profits from the company for personal use, you will be taxed on the dividends (amount) taken out. You will however have a personal tax free dividend allowance (£2000) that you can make use of. This is something to consider if your property investments are a source of income for you. If you intend to leave your rental profits in the company to pay down your mortgage, pay your corporation tax or use it to buy more property – there will be no issue.

Mortgage rates and choice 

Limited company mortgages tend to have higher interest rates and fees compared to mortgages held in an individuals name. Speak to our mortgage advisers if you would like to explore mortgages available to you.

Extra costs

Investing via a limited company can incur additional running costs. E.g. legal fees for the purchase and remortgage processes are often higher as there is extra work involved compared to investing in a personal name. Furthermore, it is wise to invest in a property tax accountant to produce annual company accounts and provide tax advice.


Buying in a limited company – The process

Setting up the limited company

The newly formed company does not have to have any history as the purpose is to legally hold the property.

The limited company must be incorporated specifying the appropriate SIC (Standard industrial classification of economic activities) code:

  • 68100 Buying and selling of own real estate.
  • 68209 Other letting and operating of own or leased real estate.
  • 68320 Management of real estate on a fee or contract basis.

Becoming a director 

Once you have formed your company, you will become a director and be responsible for meeting the legal requirements that come with owning a business. When borrowing money through a limited company, lenders will typically take a “personal guarantee” from each company director. This means, should the company not be able to pay its debts, the directors will personally pay them. For example, should your company fall behind on mortgage repayments, the bank will ask the directors to make repayments personally.

Getting your mortgage

The process for getting a buy to let mortgage via a company is similar to getting a buy to let mortgage in your own name.

  • Generally you need a 25% deposit for a buy to let mortgage
  • In order to check affordability for a mortgage, you have to have a property in mind as affordability checks by mortgage advisors are based on rental income
  • Most lenders are likely to require a personal guarantee from directors. Meaning, if the lender  was to repossess the property, and there is still money outstanding, the director offering the personal guarantee will be liable for the remaining balance
  • Lenders may not have a minimum income requirement of £25,000 but will want to see bank statements to validate your income.
  • Company directors will be subjected to a credit check as the company itself, as a new entity, will have no creditworthiness
  • You must have a business bank account open before you get your mortgage

Moving properties to a limited company

Moving a property held in a personal name to a limited company will involve a re-sale and purchase with associated conveyancing costs, capital gains tax and stamp duty (You may also have to pay an early repayment charge). You can speak to our property tax advisor if you would like to explore further.


Summary

Owning a property through a company or personally has many advantages and disadvantages. Property is a long term investment therefore, you need to consider what your long term property goals are. Each individual case is different and the decision you make will be very much based on your personal circumstance. It is wise to discuss your current situation and options with a competent property tax adviser so you make a decision best suited to your circumstances.


*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.