Buying a property through a limited company

Purchasing a property through a business isn’t any more complex than buying a residential home. But it’s essential to be mindful of the differences in lending and tax rates.

There are all sorts of reasons for buying a property through a limited company:

  • As a premise to trade from
  • To let out as a commercial or residential buy-to-let property
  • As an investment

The reason for your purchase is likely to be the decisive factor that will impact your eligibility for a commercial mortgage if you’re not buying the property outright.

Here we’ll explain the pros and cons of purchasing a property through an incorporated business to help you move forward with confidence!

Purchasing property as a limited company vs. private individual

Given the variances between corporation and income tax, purchasing a property through a business may be advantageous.

Many private landlords have found that the advantages of being a sole trader are outweighed by the restrictions on tax-deductible expenses introduced over the last few tax years.

These changes have led to a surge in registrations for Special Purpose Vehicles (SPVs) – a type of limited company ideal for a buy-to-let business.

Therefore, it’s crucial to evaluate the differences between being a sole trader and a limited company, if you’re anticipating a property purchase as part of your business plans.

Tax benefits of business property purchases

One of the most significant benefits of buying as a business relates to the tax treatment of your profits. If you purchase through a limited company, any profit you make will be liable for corporation tax, currently charged at 19%.

Therefore, if you’re a higher rate taxpayer, you could save a considerable amount on your tax obligation by purchasing a property through a limited company. As a limited business, any mortgage interest paid is a company expense. That means you can deduct those costs from your profits before paying tax.

Private landlords don’t benefit from the same allowances – they can only claim a tax credit of 20% (basic rate) against their mortgage interest.

A higher or additional rate taxpayer will be worse off if they buy a property as an individual, since they can only claim back a portion of the income tax paid.

Commercial mortgages for limited companies

A potential downside to buying property through an incorporated business is that you’ll find the mortgage options are somewhat limited.

Commercial mortgage lending is an unregulated part of the UK borrowing market, which can be a positive or a negative!

  • Most mainstream banks and buy-to-let lenders don’t lend to limited companies.
  • Those that do will often require a personal guarantee from the directors, mitigating the risk protection offered by incorporating the business.
  • If you incorporate a limited company after buying a property, you will need to transfer or sell the premises. A limited business is a separate legal entity, and it isn’t as simple as switching ownership.
  • Companies are liable for capital gains taxes on any increase in the property value between the point of purchase and the transfer or sale.

Another disadvantage is that if you buy a property as a rental investment, you will need to structure your personal income as a salary or dividend paid from the business.

These personal income streams are taxable, and any rental profit deducted from the limited company as a dividend won’t be treated as a business expense.

Choosing whether to buy property as a limited company

As we’ve seen, there are several factors worth considering before purchasing property through a business. It’s crucial to think about:

  • Your income and existing tax bands – this will help identify whether corporation tax rates will offer you tax-efficient savings.
  • The status of the property – if you own this already, you’ll need to look at transferring or selling the premise to your newly incorporated business.
  • Whether the limited company exists yet – incorporating a business will incur costs, and you’ll need to comply with requirements such as filing annual accounts.

The right option will depend on your circumstances, the purpose of the acquisition, and your tax position. So, it is highly advantageous to seek professional advice to ensure you’re equipped with the correct information to make a sound decision.

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