For many investors, purchasing a first buy-to-let property is often the beginning of a series of property purchases as they aim to build up a portfolio that brings in steady revenue.
Up until 2015, there was little need to consider the use of a Limited company (or shell company) to acquire a portfolio of properties.
But with the changes to the treatment of mortgage interest which were introduced in the summer 2015 budget, the company route has become more appealing – and we’re going to delve into the reasons for this.
Trader or Investor?
Before getting into the advantages on this, there’s a need to be clear on whether you are a trader or an investor. Here’s the difference:
A property trader buys a property, makes renovations and improvements, and sells it on for a profit.
A property investor collects rent and watches the value creep up over the years.
Why investors use the Limited Company structure
There are three reasons why you might want to purchase your properties through a limited company.
- Taxation on profits is lower
If you rent out a property that is owned through a company, the profits are considered as Corporation Tax and this is set at 20%. Whereas, profits that come to you as an individual are added to your earnings and are subject to Income Tax, which is higher.
Your tax liability is therefore half the amount if you have a limited company holding the assets.
- Tax treatment of mortgage interest
From April 2020, mortgage interest will no longer be an allowable expense for individual property investors, who will claim a basic rate allowance instead – but it will continue to be allowable for companies that hold property.
As a result, if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.
- Reduce the impact of inheritance tax
Property held by a company can avail of different devices such as trust structures and shares, and this gives more options when planning for (and reducing the impact of) inheritance tax.
Why using a Limited Company is not so convenient
There are a few drawbacks of using the limited company route.
- Mortgage availability
The availability for mortgages for limited companies is not as wide as what is available for individuals.
While this is changing, and more and more mortgages become available, buyers will still have to provide details of their personal finances to be scrutinised. Rates and fees are likely to be higher on a mortgage for a company, but this is not the drawback it once was.
- Dividend taxation
If you have a limited company and you’re taking the money out of it, you will be taxed on these as dividends.
This can be quite a hefty burden: first your company will be taxed Corporation Tax of 20%, then you’ll be taxed 32.5% on the remainder.
- Extra paperwork
You will have to deal with more accountancy and paperwork on an annual basis – but this is not a deal-breaker for most people.
Limited Company, yes or no?
The question of whether or not you should use a Limited Company structure to buy a portfolio of companies depends entirely on your personal situation. Perhaps you’ll want to pass them on to grandchildren, or you may prefer to sell them off in later years.
While the points we’ve discussed above are just for starters, it’s absolutely recommended to be quite clear about your exit strategy, purpose and intentions – and of course approach your independent financial advisor for specialist advice.