Buying Your Home Through a Limited Company
If you’re unsure what this means, read on as we take you through the advantages and disadvantages of buying property through a limited company, the tax benefits and the costs.
What is a limited company?A limited company is a legal structure that mediates between the business owners (shareholders) and the business.
When you set up a business, you can operate as a sole trader or incorporate your business into a limited company. If you go for the latter, the limited company becomes a separate legal entity, meaning it can be sued or have debts. If this happens, you won’t be held responsible, and your business won’t have to sell its assets to pay the debts.
What does setting up a limited company involve?
You’ll need to register with Companies House to set up a limited company. You’ll also have to:
- Confirm who will be the director and shareholder (it can be the same person)
- Provide a company name
- Confirm if you’ll be the only shareholder or work with a partner
- Provide the company address (it can be your home address)
- Register your company as an employer with HMRC
Advantages of buying a property through a limited company
Buying a property through a limited company brings significant advantages, from tax efficiency to risk-averseness. Below are some of them:
- Tax relief
- Inheritance Tax benefits
- Reduced liability
- Expenses can be claimed back
1. Tax reliefIf you’re a landlord and own the property in your name, you must pay income tax on your rental income. The tax rate depends on income and can be up to 45%.
However, if you own your property through a limited company, you must pay Corporation tax on your profits (19%). This is because you only pay tax on profits withdrawn from the company.
2. Inheritance Tax benefitsPlanning to pass your property portfolio down to loved ones? If you buy your property through a limited company, you can avoid inheritance taxes. That’s because they can apply for Business Property Relief (BPR) to their income and assets.
3. Reduced liabilityBuying your property through a limited company reduces liability because the property won’t be in your name. So, if the company falls into any debt, you’ll only be responsible for the part you’ve invested in.
4. Expenses can be claimed backExpenses on properties bought through a limited company are business expenses, meaning you can claim them back. One of these is mortgage interest.
Disadvantages of buying a property through a limited company
Buying your property through a limited company comes with advantages, but there are some potential stumbling blocks to be aware of:
- Mortgage rates could be higher
- Less mortgage availability
- You’ll pay taxes on money withdrawn from the company
- Moving between a limited company and personal ownership isn’t easy
- You won’t benefit from Capital Gains tax allowance
1. Mortgage rates could be higher
Although limited companies can take out mortgages like home buyers, lenders will charge higher interest rates. The bank considers lending money to a company riskier due to the reduced liability.
2. There is less mortgage availability
Because the bank sees buying a property through a limited company as much riskier, you’ll find fewer lenders willing to lend you the mortgage.
3. You’ll pay taxes on money withdrawn from the company
You must pay yourself a salary through the company to access your profits. This is considered income tax and counts as a cost when calculating your pre-tax profit for your company.
4. Moving between a limited company and personal ownership isn’t easy
To pass your property from your company to yourself or the other way around, you’ll need to transfer or sell it to the new owner (yourself) as an individual or a company. This comes with costs like Stamp Duty, Capital Gains tax and legal fees.
5. You won’t benefit from the Capital Gains Tax allowance
Capital Gains Tax (CGT) allowance doesn’t apply to limited companies, as these are subject to Corporation Tax when the profit is taken from the business.
Buying a property through a limited company can have certain benefits, such as increased tax efficiency and limited liability. However, it involves more administrative work, mortgage rates can be higher, and you may have less mortgage options.
Yes, stamp duty land tax (SDLT) still applies when buying through a limited company.
Typically, lenders require a larger deposit for limited company buy-to-let mortgages, around 25-40% of the property's value.
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