If you’re considering buying a property, especially as an investment, one of the key decisions you’ll face is whether to hold it personally or through a limited company. This choice can have long-term tax, financial, and administrative implications, and there’s no one-size-fits-all answer.
One of the most common reasons people use a limited company is the difference in how profits are taxed. If you own a property personally, rental profits are taxed as income. If you are a higher-rate taxpayer that could mean a tax rate of up to 45%. Mortgage interest relief is also restricted under current rules, meaning higher-rate taxpayers can no longer deduct all their finance costs. With a limited company, rental profits are subject to corporation tax, and all mortgage interest can be treated as a business expense. However, if you want to take money out of the company, usually done through dividends or salaries, there is likely to be further tax to pay. So, the benefits depend on what you plan to do with the income.
If the property is sold at a profit, there are differences in how Capital Gains Tax (CGT) applies depending on how the property is owned. Individuals have a CGT tax-free allowance with the rate of tax paid depending on their income and the property type. Companies on the other hand simply pay corporation tax on the gain. However, companies have no tax-free allowance and there can be different rules that apply to how the gain is calculated.
Again, the right route depends on your plans – whether you’re building long-term wealth inside a company or want easier access to the proceeds personally. If you’re looking further into the future, owning property through a company can offer more flexibility in passing wealth on to family members. Shares in a company can be gifted or passed on more easily than physical property – though care is still needed because of tax implications.
Your decision in how to hold your property will also be affected by administrative issues. Getting a mortgage through a limited company can be more complicated and is often more expensive, with fewer lenders and potentially higher interest rates. A company comes with extra administrative and legal responsibilities; the costs and time involved in filing annual accounts, confirmation statements, corporation tax returns, and keeping proper records all need to be considered.
The best option depends on your goals: whether you need the income now, plan to reinvest profits, want to keep things simple, or are thinking long-term about passing assets to others. There’s no single answer – and the rules can change over time. For up-to-date advice and support on choosing the right option for you, contact one of our accountants today.
