Should you consider investing through a limited company?

Property investors and buy-to-let landlords purchasing homes via limited company structures can benefit from a number of tax advantages.

The idea of investing in property via a limited company - which involves a business structure where the company is legally separate from its owners and managers, limiting liability - may seem daunting to some buy-to-let landlords, regardless of how many years you've been in the industry.

But for a growing number of landlords in the UK, this route is becoming the preferred option to invest in property in a more tax-efficient manner. It can mean greater profits after tax, and it is keeping more investors in the market who may have otherwise been deterred by recent tax changes.

New research from GetGround is one of many measures showing that this method of property investment is on the rise. The company has reported an increase of 150% in the number of transactions completed via limited companies over the past year, rising from 140 transactions per month to 350.

And interestingly, opting to set up a limited company to purchase property is not just popular among well-established buy-to-let investors. GetGround noted that it is increasingly being used by first-time landlords, too, with growing numbers also reporting they are interested in setting up a limited company in the future.

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Why consider a limited company?

One of the main reasons that most investors choose to buy their properties using a limited company is tax-linked.

Essentially when buying through a limited company, you own the company and the company owns the property, meaning that different tax rules apply compared to if you were buying it as an individual.

Since April 2020, individuals in the UK have no longer been able to claim mortgage interest payments as an expense on personally owned properties when calculating their income tax bill. Individuals instead receive a basic rate reduction of 20% from any financing costs or mortgage interest payments. For higher tax-rate payers, this could mean a bigger bill than before.

However, for limited companies owning property, the whole mortgage interest payment is tax allowable, meaning the tax bill is lower. Also, rather than paying income tax, the property's income is subject to corporation tax, which is currently 19%.

Other perks for investors include being able to pass property owned by the limited company on to family members without being liable for inheritance tax, provided they are shareholders in the business.

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There are cons, too…

For those landlords who don’t yet operate via a limited company, there are a number of considerations to take into account, as it may not be the best route for everyone.

One of these is that it may be necessary to employ an accountant to help with filing the additional accounts, which may not seem worth it if you only own one or two properties.

If you already own a property - or multiple properties - and wish to make a transfer from personal ownership into a limited company, this can also pose problems. The landlord would technically need to sell the property to the limited company, meaning capital gains tax and stamp duty would be due.

With these issues in mind, it is normally advisable to speak to a specialist when considering property investment through a limited company structure. As GetGround’s data shows, though, more and more buy-to-let landlords are seeing the benefits of accessing this avenue, which could be a positive for retaining landlords in the industry.

Commenting on the figures, GetGround chief executive Moubin Faizullah Khan said: “Just as we’re seeing an uptick in interest from investors looking to purchase energy-efficient, new build properties, they are also turning to limited company structures to optimise their finances.

“From tax efficiencies to personal liability, there are many good reasons why limited company investing makes good business sense, but ultimately it comes down to efficiency.

“Efficiency is key to investing sustainably, responsibly and profitably. In tougher economic times, the ability for landlords to optimise their buy-to-let portfolios for the long-term is proving crucial.”