Buying property through a limited company

Are you feeling the pinch of property related taxes? Well, you wouldn't be alone – the second quarter of 2024 saw stamp duty land tax transactions increase by a whopping 15% from the first quarter and 9% when compared to the same period last year. 

Taxes have led many to consider buying property through a limited company, but is that the right choice for you? This guide will walk you through the key factors, including tax implications, pros and cons, and financial property options. 

What does buying a property as a limited company mean for you?

Purchasing a property as a limited company rather than as an individual means the property is owned by the company, which makes the company liable for any taxes, debts, insurance, maintenance, and legal costs.

There are several reasons companies decide to buy properties, including to: 

• Produce rental income

• Manage a buy to let property portfolio 

• Purchase a company headquarters

• Operate a brick and mortar business premises

There are also several different reasons individuals decide to set up limited companies to manage their property portfolio, with tax benefits being the most popular reason. Here are a few of those tax implications.

The tax implications of using a limited company 

• Stamp duty: On top of standard stamp duty land tax, which you still need to pay as a limited company, you also need to pay an additional 3%. 

• Tax: Individuals need to pay income tax between 0-45% depending on their tax band. On the other hand, corporations pay between 19-25%, which can result in tax savings. 

• Inheritance: In some circumstances, it’s possible inheritance tax won’t need to be paid on a property owned by a limited company.

• Deductions: Limited companies can deduct the full amount of mortgage interest payments as an expense from their tax liability where individuals can be limited to 20%.

• Capital gains: There is no capital gains tax allowance, as there is in the amount of £3000 for individuals or £1,500 for trusts. So you will need to pay the full 19-25% tax on any profits when it comes to selling the property.

Is a limited company the right choice for you?

Every individual circumstance is unique, which is why the decision can only truly be made by you. However, one helpful way to come to a decision may be to break down the costs and taxes of working through a limited company over working as a private owner.

Example: Let’s say you’re a higher rate taxpayer planning to acquire a property for £1M. You’ve already used your personal allowance and lower tax rates at your day job, so the total tax you need to pay will be 45% on any profits. The mortgage is £800,000 and the rental income would be £50,000 per year.

As a landlord, you would pay 45% of £50,000, which would cost £22,500.

As a limited company, there is some tax efficiency in this circumstance. Assuming you earn more than £50,000 in profits per year, you would pay 25% of £50,000, which would cost £12,500. 

If your limited company earned less than £50,000 in profits per year, you would pay 19%, which would cost £9,500.

Example: Comparatively, let’s imagine you’re a first time landlord with a £50,000 property that earns you £5,000 per year. You didn’t take out a mortgage and you earn £30,000 at your current job. 

As a landlord, the rental income would be added to your current income and taxed at 20%, so you would be expected to pay £1000 in income tax per year for your rental. 

As a business earning under £50,000 you would be expected to pay 19%, so your corporation tax liability would be £950. While there is a £50 reduction, the cost of setting up and managing a limited company would likely surpass this £50 saving. 

As you can see, the tax benefits of buying rental properties through a limited company tend to go up as the profits do. 

Example: Let’s say you’re a sole trader running a mechanic shop. You would like to purchase a newly available property down the road and are wondering if it’s a better idea to purchase it individually or to set up a limited company.

As a limited company, you could: 

• Deduct expenses related to the property from your company profits 

• Receive some limited liability protection

• Pay the corporation tax rate on company profits which could be a reduction in cost if you’re a higher rate taxpayer 

• Deduct the mortgage interest as a business expense 

However, you may also have to: 

• Pay an additional 3% on top of stamp duty when purchasing the property 

• Pay higher mortgage interest rates 

• Hire an accountant if you don’t already have one 

• Conduct the administrative activities involved in running a business 

In this instance, you might want to consider: 

• Your current tax position – are you a higher rate taxpayer? If so, the reduction in tax liability may be beneficial 

• Your comfort managing a company 

• Whether or not you want limited liability 

Only you know what’s right for your business, but we do recommend speaking with a financial advisor and an accountant to make sure you’re armed with all the facts before deciding.

👉 Apply to purchase a property as a limited company here.

The pros of using your own company to buy property

• Inheritance tax: If you pass away, your successors may need to pay inheritance tax. However, this isn’t the case with a company as the property is owned by the company.

• Liability: While shareholders and directors are still responsible for their company, the amount of liability is reduced in certain circumstances. Do be aware many lenders ask for a personal guarantee when borrowers take out limited company mortgages.

• Profits tax: As outlined in our example above, there are occasions where the amount of tax you pay on profits could be reduced by operating a limited company rather than as an individual. This benefit generally tends to go up as your profits do. 

• Mortgage interest deductions: While mortgage interest deductions are capped at 20% for private landlords, you can still deduct the full interest amount as tax relief as a limited company, but do note that interest rates are often also higher for companies.

• Reinvesting: If you decide to reinvest the profits made from your property into the business, you may be able to take what you invest off your corporation tax bill. 

Drawbacks of buying property as a limited company

• Transfer of ownership: Transferring ownership of a property you currently own privately to a limited company you set up could incur stamp duty and capital gains tax. 

• Admin: Running a company is serious business. There are a range of administrative duties involved that sole traders and private landlords simply don’t have to deal with, including paying corporation tax on your profits and filing annual accounts with Companies House.

• Hiring: You may have to pay for an accountant to help you manage your taxes as a limited company.

• Mortgages: Interest rates are often higher for limited company mortgages.

The difference between buy-to-lets and commercial properties 

Commercial properties are designed for businesses to inhabit, such as:

• Office buildings

• Hair salons

• Mechanics

• Retail stores

• Warehouses 

On the other hand, buy-to-lets are designed for other people to inhabit with the intention of the business turning a profit from those rental agreements. Commercial properties can still turn profits but these usually take the form of an increase in value when the time to sell comes around. 

When taking out finance options, both of these routes come with different financial solutions, namely, buy-to-let mortgage vs commercial mortgages. 

Buy-to-let mortgages

• Expected deposit amounts usually approximate around 25-40%. 

• Application checks will usually focus on the expected rental income 

• Personal guarantees are often required 

Commercial mortgages

• Expected deposit amounts usually approximate around 15-30%  

• Application checks will usually focus on the company’s financial health, credit history, and the value of the property 

• Personal guarantees may or may not be required depending on the health and history of the company 

Specific factors for buy-to-let companies 

More buy-to-let companies were set up in 2023 than ever before, with the number hitting a record 50,000 in a single year, including a surge of 21.9% in companies owning just one property. 

If you’re a landlord, this trend might not surprise you when you consider the events of 2015-2017, when there was a decrease in the number of tax advantages available. For example, private landlords can no longer deduct 10% in wear and tear allowance.

With 615,077 buy-to-let companies now in existence (an increase of 82% on 2016), it’s clear this strategy is gaining traction. And there’s a reason. 

The key benefits of managing a rental portfolio via a limited company are tax related, specifically, the 19-25% corporation tax as opposed to the 0-45% personal income tax and the ability to deduct mortgage interest as well as other expenses. 

There are also liability considerations, in that there is limited liability for company owners as opposed to private landlords. With a limited company, you can also have more shareholders, allowing for flexible profit sharing and ownership agreements. 

There’s also a branding consideration. While tenants may perceive renting from a limited company as more professional than from a private landlord, they might also expect repairs to be done in a more timely manner. 

You may also want to consider your decision making structure. As a private landlord, decisions are simple – you decide, but, if you have shareholders, each of those members gets to have a say in how decisions are made. 

Finally, there may be greater scalability when it comes to developing a rental portfolio as a limited company. This is due to the corporation tax rate not surpassing 25% no matter how high profits reach. Whereas once you pass £125,140 in profits as an individual landlord, your profits are taxed at 45%.

Understanding SVPs

You may have heard of SVPs during your search – Special Purpose Vehicles are separate legal entities able to hold their own assets. They’re usually created for a specific purpose, as opposed to limited companies, which are created for broader business purposes and can engage in a variety of activities. They’re laser focused, designed to own and manage a single asset or project with the intention of isolating legal and financial risks.

Strategies for incorporating an existing property into a limited company

We are not legal advisors and we highly recommend you speak to a legal attorney or qualified tax advisor before transferring ownership of a property. 

Sale

This one is fairly self explanatory – you, as an individual, sell the property to your limited company. You may need to pay capital gains tax and stamp duty. 

Exchange 

You could potentially exchange the property for shares in the company which may entitle you to incorporation relief. This is when you delay paying capital gains tax on the properties until you sell the company shares.  

HMRC vs Ramsay

In 2013, a landmark case involving HMRC resulted in a favourable outcome for the property owner, Ramsay. The ruling allowed Ramsay to avoid paying for ownership transfer as it recognised her previous management of her portfolio as a business activity. 

HMRC have since updated their internal manual to say: “You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business. Other cases should be considered carefully.” 

If you choose to go down this route, bear in mind you would need to hold enough properties in your portfolio to justify 20 hours of work per week. 

Property finance options for limited companies

There are a range of finance options available to limited companies looking to purchase properties, including:

• Bridging loan: These bridge the gap between funding by providing secured, short-term loans that can be paid back when further funding is established, for example, in the form of the sale of a different property or the clearance of a mortgage.

• Property development finance: This form of finance is specifically designed to fund the development of property or land, including renovation and large-scale building work.

• Buy-to-let mortgages: There are mortgages specifically available to limited companies looking to rent out the properties they purchase.

• Commercial mortgage: A commercial mortgage enables businesses to purchase real estate for business purposes, for example, to use as an office headquarters or as a brick and mortar retail shop base.

• Semi-commercial mortgage: If part of a property is used for residential purposes and another section is used for commercial reasons, limited companies may be able to apply for semi-residential mortgages.

• Auction finance: Auction finance is a type of bridging loan. The lender provides the funding that enables the borrower to walk out of the auction house with the property in hand and the company can then repay them when further funding is secured, for example, in the form of a mortgage.

How to set up a limited company

Setting up a limited company is more straightforward than it sounds. It all starts with picking a name. You can use this tool offered by the government to find out if the name is available.

Next, register the company. Tide makes this an easy, inexpensive process by offering a company registration service that incorporates setting up a business bank account, all for only £14.99. 

There are essential records you’ll need to keep from day one, including details on who the shareholders and directors are and notes on any decisions you make regarding how your business will be run. Also, be sure to hold onto any receipts or invoices. 

Commercial mortgage lenders: your options 

High-street banks are the most obvious choice to secure a mortgage as a company, but the eligibility criteria may be too stringent for many buyers. You will need to have a solid grasp of property development finance before you go down this road, as commercial mortgages can be complex for first-time investors.

This is often the reason why new buyers will turn to specialist lenders who can be accessed via lending platforms. The advantage of a lending platform is your specific needs will be matched with a lender who can offer the best rates and terms for the particular type of property you are looking to acquire. 

Always make sure that the lender you deal with is authorised and regulated by the financial conduct authority – some scammers pretend to be legitimate firms. You can check if a lender is authorised by entering their name or reference number on the FCA homepage.

Get help applying for property finance

We help match eligible limited companies and sole traders to suitable lenders. Don’t worry if you haven’t decided exactly which financing option you’d like to use – our expert advisors are here to help you throughout the process. We can walk you through everything from bridging loans to commercial mortgages and everything in between. 

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.