Should I buy property through a limited company?

Starting a property business can be a great way to invest long term and short term. But should you do it as an individual or a limited company?

Many people are turning to bricks and mortar amid dwindling returns on more traditional investments. And for good reason.

According to figures from the Office for National Statistics (ONS), the average house price in England increased by 9.4% over the year to January 2022 and is now at a record high of £292,000.

But deciding whether to operate your business as an individual or a limited company can be challenging. We spoke to UKBF member Steve Tanner, director at Leap Accounts & Outsourcing, who has advised many clients on this issue. In this guide, we explain the pros and cons of each.

Advantages of buying property through a limited company​

Lower tax for high earners​

If you're buying property as an individual, rather than a limited company, any rental income you make is going to be taxed at your effective tax rate alongside other earnings, Steve explained.

While this might not be an issue for people in lower tax brackets, high earners stand to pay 40-45% tax on any rental income. If you buy property through a limited company, you will only pay corporation tax until you withdraw your profits, which is currently charged at 19%.

Ability to reinvest profits to expand​

One of the main benefits of purchasing a property through a limited company is that you can hold the rental profits you generate within the business and use it to reinvest in more property.

“That's not an option as an individual,” he said. “If you're a 45% taxpayer, you're paying 45% tax on all profits regardless of whether you want to put those funds back into buying more property or not.”

Stamp Duty savings​

Stamp Duty is paid on all residential properties sold above £125,000 at a sliding rate of 2-12% (with a potential 3% surcharge) and will be the same regardless of whether you purchase as an individual or through a limited company.

However, when you come to sell the property, selling the shares of your limited company rather than the property it owns means your buyer will pay stamp duty on the sale of shares (rather than on the property) at only 0.5%. This can make your property a far more appealing proposition.

“If a buyer is willing to purchase the limited company rather than the property, you would only pay stamp duty on the shares because you're not actually disposing of the property – it's just the owner of the company is changing.

“So that's an effective way to reduce stamp duty, although it’s always worth checking the capital gains implication in these instances,” Steve explained.

It’s easier to buy property with others​

If you’re considering purchasing property with other people – or would like the option to do so at a later stage – setting up a limited company can be advantageous.

“If someone else wants to get involved in that property business and put some equity into it, to buy a second property together for example, that's very easy to do in a limited company,” Steve said.

And if people want to leave the business later, buying back their shares is much simpler and cheaper than trying to divide assets as individuals.

Limited liability​

Limited companies have their own assets, profits and liabilities. This means the personal finances of company owners and shareholders are protected by “limited liability”.

“Assuming no fraud has taken place, 'limited liability' means you will not be personally liable for any financial losses made by the business,” Companies House states. “A limited company can give you added protection, should things go wrong.”

Disadvantages of buying property through a limited company​

Setting up and running a limited company is challenging​

The first disadvantage is that setting up a limited company can be complicated. We have an in-depth UKBF guide on how to set up a limited company. But in brief, you’ll need to:

1. Choose a name that meets legal requirements
2. Choose directors and a company secretary
3. Decide who the shareholders or guarantors are
4. Check what records you need to keep
5. Register your company with Companies House

There are also more responsibilities involved with running a limited company than operating as a sole trader and extra costs to consider.

“You have to submit accounts every year, you have to submit a corporation tax return, you have to submit a confirmation statement, and so on,” Steve explained.

“You’ll have to pay an accountant at least £500 plus VAT a year. If you've only got one small flat and you're renting it out, that alone is going to eat into some of those tax savings straightaway.”

Mortgages are harder to find​

There are far fewer buy-to-let mortgages available to limited companies than individuals, and they typically charge higher interest rates. This is because lenders consider limited companies more risky due to the fact they are not tied to an individual.

Transferring properties to a limited company is expensive​

If you already own property and would like to transfer it to a limited company, this can be very costly. This is because you will need to pay stamp duty to essentially sell your house to your company. Plus, there will be legal fees.

Is buying property through a limited company right for me?​

Ultimately, every situation is unique. The only way to be sure whether buying property through a limited company is the best option is to speak to a professional.

“People ask me regularly whether they should buy a property in a company or as an individual,” Steve said.

“For people who are buying one property, I often suggest owning it as an individual. But if people are looking to build a portfolio and run it as a business, then I tend to suggest forming a limited company.”