BLOG: What are the pros and cons of investing in property via a Limited Company?

admin    Uncategorized     agents

A recent survey from Paragon Bank suggested that the number of landlords planning to set up a Limited Company to purchase a buy-to-let property reached 62% in the second quarter of 2022, up from 50% in the first quarter of the year.

According to the research, this is the highest proportion of landlords in the last three years that have indicated they are moving to a Limited Company.

Although some landlords have been investing in buy-to-let via a company for many years, the trend has increased rapidly since April 2017, when the government decided to phase in changes to the rules on how mortgage interest was taxed.

By April 2021, none of the interest paid on buy-to-let mortgages could be deducted from rental income; instead, investors filing Self Assessment tax returns would apply a relief of 20% to the cost of mortgage interest and other finance costs. This typically penalised higher-rate tax payers who could, in the past, have claimed 40% or more tax relief.

Attractive option?

Meanwhile, those that invest through a Limited Company are still allowed to deduct finance costs from their rental profits so, on the surface, that may seem a more attractive option for landlords.

However, it’s important to be aware that this is not straightforward and there are a number of factors that can affect whether such a move would be beneficial overall to you. So, if you’re considering making new investments via a Limited Company and/or transferring the ownership of existing buy-to-lets, you will need expert advice.

For any professional to be able to advise you, it’s important that they understand both your own personal financial situation and also your long-term property investment objectives.

For instance, are you looking to invest for pension income? Do you plan to pass on your portfolio to your children? Only then can all the pros and cons be properly taken into consideration, to help assess whether investing via a Limited Company is the right thing for you.

The pros

• You can deduct all your finance costs from the rental income.
• Typically, you pay a lower tax via the company, versus rates of personal income tax.
• Transferring ownership of a property or portfolio can be easily done via reallocation of shares, rather than changing the actual ownership of the property.
• Any profit you make can be kept in the company until you need it, rather than having to be declared in the year that you personally earn the income from buy to let. If you’re looking for income when you retire, drawing down dividends as and when you need may be a better option for you.  
• You may be able to save money when selling a property via a Limited Company rather than as an individual.  
• It can improve your profit and loss balance, as Limited Companies have to carefully account for every expense, which you may not be doing if you investing as an individual.
• If you wish to pass on your portfolio to your children, making them shareholders or a Company Director can be much more cost-effective than them inheriting property.

The cons

• You can’t simply transfer a property from your own ownership to a company without incurring costs such as Stamp Duty charges (Land Transaction Tax in Wales; Land and Buildings Transaction Tax in Scotland).       
• Financing via a commercial mortgage may cost more than financing a buy-to-let as an individual and you may have to pay higher fees as well. On top of this, you’re likely to have to pay for your Limited Company bank account, which currently may be free of charge.
• You need to calculate whether the overall amount of tax you pay via a company will be less, or at least no more, than the amount you pay investing in your own name. For instance, with a Limited Company, you will pay Corporation Tax, tax on dividends and will lose your personal allowances and exemptions. 
• You will need expert advice to understand the most tax-efficient way for you to set up a Limited Company, how to manage your funds via a company, your ongoing accounting and filling in tax returns differently. So you may incur higher ongoing costs if you need to employ an accountant to make sure you produce accounts according to government rules and regulations.

If you haven’t already, it’s worth finding out if investing in buy-to-let via a Limited Company could be right for you. We’ve partnered with GetGround, who have helped over 10,000 property investors set up their own Limited Companies and their experts can work with you to discover whether it might be worthwhile for you to make the switch.

If you’re keen to find out more, do contact your local Leaders branch and they will put you in direct touch with the experts at GetGround.

View Full Article: BLOG: What are the pros and cons of investing in property via a Limited Company?

If you enjoyed this article please consider sharing it!