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