Commercial landlords using limited companies as investment vehicles

In recent years, there has been a substantial increase in buying investment property through limited companies. A new snap poll by GetGround published by Property Reporter has revealed that three quarters (75%) of landlords operating in the UK have now used a limited company to invest in at least one of their investment properties. The recent and rapid development has been primarily driven by the need to mitigate the new rules surrounding mortgage interest relief and the potential tax saving investing through a limited company has to offer.

As the rise in inflation continues to dominate headlines, it is important for landlords to consider how using limited companies as investment vehicles could prove beneficial.

Advantages of buying and holding property as a limited company:

1. Tax

If you own a property personally, any profits made, such as rental income, will be added to your other earnings and be taxed as income tax. On the other hand, any profits made from properties owned as a limited company will be taxed at the current rate of corporation tax. For higher and additional rate taxpayers, the potential tax saving is significant. Owning a property personally would mean paying 40% and 45% on rental profits versus paying 19% where the property is held as a limited company.

2. Mortgage Interest relief

Private landlords are no longer able to deduct mortgage interest from rental income to reduce the tax they pay. Instead, they receive a tax credit equivalent to 20% of any interest paid. As the credit only refunds tax at the basic rate, higher and additional rate taxpayers are now paying significantly more. In contrast, as a limited company, mortgage interest is treated as a business expense and is therefore allowed to be offset against any profit the company makes when calculating corporation tax.

3. Personal Protection

A limited company has a separate legal personality. In the event of the limited company being unable to pay its debts, creditors will only be able to take action against the company itself, and therefore shareholders personal assets will be protected.

4. Inheritance planning

By holding property as a limited company, landlords can pass properties onto their family members in the most tax-efficient way by reducing, or even eliminating the inheritance tax that would otherwise be payable on their death. This is because Business Property Relief (BPR) to can be applied to their income and assets which will reduce the value of the property when working out how much inheritance tax has to be paid.

Disadvantages of buying and holding property as a limited company:

1. Mortgage Rates

For limited companies, mortgage options are fairly limited in comparison to the options available to individual borrowers. The majority of mainstream banks are reluctant to lend to limited companies. Lenders that are willing will often require a personal guarantee from the directors, mitigating the risk protection offered by owning property as a limited company as discussed above. In addition, limited company mortgages interest rates and fees are typically higher than those for individuals.

2. Accessing Profits Made

A landlord operating through a limited company will need to pay themselves a salary or dividend in order to access their rental income. Rental profits taken as dividends are not considered a business expense. The tax-free allowance on dividends is £2,000 for the tax year 2022-2023. If a landlord decides to take out more than their allowance, as a higher or additional rate taxpayer, they could be paying between 33.75% and 39.35% on any additional dividends taken out.

3. Cost and Administration

As a limited company, a landlord will be required to file annual accounts, which will mean the additional cost of instructing an accountant. Nonetheless, buying and owning property through a limited company can be a pragmatic solution for many people, particularly for landlords that are higher/additional taxpayers and/or for landlords that own more than one property.

At mfg, we can offer you professional legal advice to ensure you are fully equipped with the correct information to make the best decision for you and your property investment. For more on how we can assist you, email Head of Commercial Property, Clare Regan on clare.regan@mfgsolicitors.com