The pros and cons of property investment through a limited company

The financial year 2019 is almost at an end, which means that the last vestiges of mortgage tax relief are now also coming to an end. It also means it’s now decision time for residential landlords who are still operating as private individuals, i.e. outside of the framework of a limited company. They can either continue as they are and find some way to absorb these increased expenses or pass them on to tenants, or they can set up a limited company to hold their investments. Here are three key points to consider before you make that decision.

Setting up a limited company has an upfront cost

In principle, you can set up a limited company just by filling in an online form at the Companies’ House website at a cost of £12 for “standard” turnaround (within 24 hours). In practice, it is often a very good idea to get legal advice before you make your application and, of course, you will have to pay for this. If you already own properties which you would like to transfer into your new limited company then you will need to pay capital gains tax and stamp duty (LBTT in Scotland) and you may have to remortgage, which could increase your initial costs even further.

Managing tax can be much simpler for private landlords than for limited companies

As a private landlord, you will pay income tax on the profit you make from your rental properties. You might disagree with how the level of profit is calculated, but the calculation is, at least, fairly straightforward. This is not necessarily the case when operating within limited companies. A limited company pays corporation tax, which currently starts at 18% (for profits under £30K). This is lower than even the basic rate of income tax (or even the starter rate in Scotland).

Managing tax is one of the considerations when planning to transfer to a limited company. (Photo by enciktepstudio via Shutterstock)

The key point to note, however, is that this is the tax the company pays to the government. When money is taken out of the company and paid to individuals, then the government will want its share. If you pay yourself (or anyone else) a wage, then it will be subject to income tax and national insurance in the usual way. If you pay out dividends, then you can use your “dividend allowance” of £5000 per year, but after this dividend income is treated as standard income and taxed as such.

Private landlords have a much greater choice of mortgage lenders

The basic idea behind a limited company is that any debts incurred by the company stay with the company itself rather than the individuals who own it. There are certain situations in which individuals can be held liable for the debts of limited companies but these are very exceptional. If a limited company files for insolvency, its assets will be sold and used to pay back creditors according to an established legal process.

This means that a mortgage lender could end up receiving only a small percentage of the funds achieved from the sale of the mortgaged property. Because of this, there are only a relatively small number of mortgage lenders who will lend to limited companies and this is highly unlikely to change any time soon.

(Featured image by sommart sombutwanitkul via Shutterstock)

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.