Buying a property through a limited company

The main advantage of buying a property through a limited company is the tax benefits.

Setting up a limited company can make sense if you are a higher rate taxpayer. Rather than paying income tax on your profits, at up to 45%, landlords who own rental property through a limited company will pay corporation tax on their profits at a much lower rate of 19% in 2020.

In the past, the income tax you paid could be offset by generous mortgage tax relief. Private landlords were able to claim tax relief on their mortgage interest at the rate they paid income tax; at as much as 45% for those paying the highest rate of tax.

Since 2017 this relief has been gradually reduced, meaning that this financial year landlords will only be able to claim relief at the basic tax rate of 20%.

How to decide if using a limited company is right for you

Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on four factors:

How much income do you have?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

Do you want the property income to live off?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

Do you use mortgages?

The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.

Who are you buying properties for?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

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