Advantages and disadvantages of limited companies

Running a company isn’t for everyone and many people prefer to own investment property personally. However, if you are planning to build a portfolio of investment properties, owning via a limited company is more tax efficient than personal ownership.

We’ve outlined the pros and cons of using a property investment company below.

Advantages of limited companies

Improved tax efficiencies and planning

Holding property in a limited company can offer tax benefits. If you’re a higher rate taxpayer or plan on owning multiple properties, you’ll especially find there’s a tax saving. When you own a property personally in your name, the rental profit is added to your other earnings (such as from your job) and taxed as income tax. Rental profits on properties held in a limited company are not taxed at your personal tax rate but the current rate of corporation tax, which tends to be around half of the higher rate of income tax. As a director, you then have the flexibility to choose what to do with the profits - invest in further properties, top up your pension or pay out the profit using tax-efficient dividends. This flexibility can help with your personal tax planning compared to personally owned properties. You can read more about tax for property investors in our expert-authored guide, Introduction to Property Tax.

Portfolio expansion

Planning to expand your property portfolio? You can retain your profits within the company to fund future purchases without them being subject to income tax (until you decide to draw the profits out of the company). Retaining earnings within the company helps to protect them from tax liabilities, so you can repay any debt and expand your property portfolio faster.

Inheritance planning

Property held within a company gives more options when it comes to planning for inheritance tax. If you plan to pass your business on to your family in the future, it’s much simpler to transfer a limited company than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.

Disadvantages of limited companies

No capital gains tax allowance

When a limited company sells its property, there is no capital gains tax allowance. An individual selling a property would only have to pay capital gains tax on the overall gains above their tax-free allowance. A company will be liable to pay tax on all gains. However, this can be offset by the increased tax efficiency available throughout the rental lifetime of the property, and, for higher rate taxpayers, the tax rate paid through a company could be lower. The tax implications are complicated, and everyone’s personal tax liability will be different. It’s well worth getting independent tax advice before making any big decisions.

Dividend taxation

If you intend to take your profits out of the company (to spend on your living costs, for example), you’ll be taxed on the dividends you take. You do, however, have a personal tax-free dividend allowance which you can take advantage of.

Mortgage rates and choice

A staggering 77% of all buy-to-let mortgage applications were made through limited companies in the first half of 2019. Currently, many lenders charge higher interest rates and fees to limited companies compared to individual buy-to-let mortgages. However, with so many lenders now going down this route thanks to the tax incentives, this is changing. It’s worth shopping around for the best deal. Thankfully the differing tax treatment also means that lenders’ stress testing is often more favourable for lending to limited companies over personal ownership.

As you’re probably starting to see, there are a lot of different variables at play. You need to take the time to weigh up all the pros and cons and chat to an expert before you choose what works best for you and your investments.

The role of an accountant

Many people think that limited companies are complicated and difficult to maintain. While there is an extra layer of responsibility, it can easily be incorporated into your investment plan and requires little effort relative to the potential benefits. As a director of a company, you’ll legally be required to keep accurate company and financial records and submit the appropriate accounts and returns to Companies House and HMRC. There is, of course, time and cost associated with this and that’s why most company owners use an accountant to support them. That’s exactly what we do here at Provestor: we’re a specialist accountant firm and we’ll manage the majority of your accounts for you, while you focus on building your portfolio.