Limited Company vs Private Landlord

Investing in property can be a potentially lucrative investment both long and short term. However, government changes have made it less tax-efficient for Landlords to own and rent properties.

How you structure your business is more important than ever and many clients are asking whether a property should be owned in their own name or through a limited company.

There are a lot of variables involved and pro's and con's mainly involving taxation. We will cover these in this article but if you do require any clarification, we have a team of experts at Mitchells Grievson in this field who are more than happy to discuss this with you.

Stamp Duty

Buying an additional residential property to rent and renovate will incur a further 3% Stamp Duty Land Tax both as a limited company or private landlord. 

Should I use a Limited company?

There is often not a straightforward answer which will depend on each client's individual situations and the ever-changing circumstances which is impossible to predict. However, as generalisation if you are purchasing the property as a long-term investment then 'yes' a limited company is likely to be the best structure.

Furthermore, if any of the following apply then a Limited company becomes more attractive if you:

• are borrowing money to purchase the property
• wish to share income with family members or wish to pass the property on in the future.
• have other income which uses your basic rate tax band
• don't require the monies to live on and would like to retain it within the company

Calculating rental profits

Private landlord:

If you own a property as a private landlord, you are restricted to amount of mortgage interest you can claim against your rental profits. Consider the following:

• Rental Profits Calculation: (Rental income less costs) you do not deduct mortgage interest
• Rental profits now add together with all other income to determine your total income
• This will assess how much falls into higher rate tax
• A mortgage reducer can then be applied to your rental profits of 20% of your mortgage interest

This means that some basic rate taxpayers may end up paying the same. However, the calculation can take you into higher rate tax which could impact the tax payable on your rental profits significantly especially if your mortgage interest costs are high. Higher rate taxpayers could also lose child benefits.

Limited company:

These rules known as section 24 do not apply to Limited companies. They only pay tax on the profit after full deduction of the mortgage interest.

As a result of this many property investors are looking to transfer portfolio's over to a limited company but it's not easy as there some barriers which may prevent this being a viable option including:

• Cost to transfer the properties including stamp duty and conveyancing
• Capital Gains tax due if the property has increased significantly in value
• Transfers of buy-to let interest only mortgages

However, there are no guarantees that the government will extend section 24 to limited companies in the future.

Family Investment Company:

Buying property through a Family Investment Company to hold the property enables the ownership and income to be split between several family members. This structure enables you to:

• Take advantage of splitting the income between several members of the family in a proportion that suits your requirements
• Mitigate Inheritance Tax (IHT) in the future by transferring over small numbers of shares each year and utilising capital gains allowance, so no tax is payable

Pension contributions via limited company:

Clients wishing to retain profits rather than spend have the option to invest these profits in a pension whilst saving corporation tax and protecting your income within a pension scheme, often free of IHT. Key considerations include:

• A maximum pension contribution of up to £40,000 can be made each year
• Contributions are a deductible expense, reducing corporation tax by 19% in the tax year of payment
• Contribution restrictions apply to people earning over £150,000 per year or have already drawn down on their pension
• Contributions should be wholly and exclusively for the purposes of the trade
• Contributions are not linked to your salary which are often low as a director
• Usually beneficial to pay pension contributions from your limited company rather than make personal contributions which would be restricted and linked to your salary

Mitchells Grievson always recommend having a Chartered Financial Advisor to assist you with calculating this amount.

Do you have an existing limited company?

If so, in most cases we would advise against using your existing business to purchase properties. 

• Using a separate company to purchase your properties will protect them from the risk of something going wrong with your existing business
• Many businesses get into unforeseen difficulties and debt which can result in liquidation
• This can result in potential sale of your properties if held within the same company

Another benefit of holding the properties within a separate company is that you can choose the shareholding arrangements, so you have complete flexibility without affecting your other income. 

What are benefits of holding a property personally?

Selling an asset personally means that you will be subject to capital gains tax (CGT). Things to consider are:

• CGT is charged at 18% (Basic Rate) or 28% (Higher Rate)
• Each year you will get a £12,300 CGT allowance (2022/23 tax year) which will be tax free
• If jointly owned, you can use each person's allowance giving the first £24,600 profit tax free
• Potential significant savings if your strategy is to renovate and sell one property each year

If your businesses strategy was to buy numerous properties with low profit margins and to sell them over the course of several years, this could be another situation where you may pay less tax by owning them personally. However, this gain may be offset by higher tax on rental profits.

Selling a personally owned property will result in the profits being within your own personal wealth. Alternatively, selling your property held within a limited company mean the profits belong to the company and are subject to additional tax to access the funds as a dividend.

Additionally, you can avoid costs and responsibilities of owning and running a limited company which, some people may find onerous. 

Summary: Owning a property personally or via limited company

We have professional chartered accountants that deal with these questions daily which can help you make the best decision for you. Call 01388 605785 or email advice@mitchells-online.com

Please note: This article was correct at the time of writing 26/05/2022. All tax allowances are based on 2022/2023 tax year.