What are the Benefits of Buying Real Estate Through a Limited Company?

When you set up a limited company, you set up a completely separate entity from you yourself in the eyes of the law. This means that if you buy something through the limited company, it becomes property of the company - not you personally.

Far from complicating the process, this can actually make purchasing real estate easier. Not to mention, a more profitable venture - buying through a limited company brings a variety of tax-related benefits.

The extent to which buying through a limited company can be beneficial (or even advisable) will depend entirely on the objectives, priorities and financial position of the investor. Just as buying through a limited company is ideal for some, it is less suitable for others.

It is therefore important to consult with an experienced broker or adviser, before deciding which way to go.

A few of the potential benefits of buying real estate through a limited company include the following:

1. Tax treatment of profits

If you are a private landlord, the income you generate by way of rentals on BTL properties are taxed as normal earnings. This means you will be liable for the standard amount of income tax payable as you would be with any other form of income, as follows:

Tax Band

Income

Tax Rate

Basic Rate

£12,501 to £50,000

20%

Higher Rate

£50,001 to £150,000

40%

Additional Rate

over £150,000

45%

When running a BTL business through a limited company, your tax obligations are switched to corporation tax. 19% is the current flat-rate corporation tax rate, scheduled in 2023 to increase to 25%.

Either way, this could add up to massive savings for higher-rate taxpayers, who would be liable for 40% taxation or more on rental income. If you are already a higher-rate taxpayer or could be pushed into a higher bracket through your buy-to-let business, it may be worth considering setting up a limited company.

2. Mortgage Interest Tax Treatment

Recently introduced legislation removed landlords’ entitlement to deduct mortgage expenses from rental income. Something that resulted in much higher tax bills for many. The incentive was replaced by new tax credit, based on 20% of their mortgage interest payments.

However, as this tax credit applies only to tax at the basic rate, it is nowhere near as attractive to higher-rate taxpayers. If you fall within a higher tax band, you will not receive back all of your tax on your mortgage payments.

An issue that can be avoided by purchasing through a limited company, wherein mortgage interest is classified as a business expense.

3. Reduced Inheritance Tax Benefits

Depending on your circumstances and the nature of your portfolio, purchasing property through a limited company can significantly reduce inheritance tax liability.

Something that should be considered by anyone planning to pass ownership of their properties to family members or anyone else, at the time of their death.

Are There Any Disadvantages to Buying Real Estate Through a Limited Company?

The most immediate disadvantage to limited company property purchases is mortgage availability. There are significantly fewer buy-to-let mortgages on the market for limited companies than for individual investors. In addition, interest rates and borrowing costs on these types of mortgages are usually higher.

In addition, accessing rental income generated through a limited company property purchase means paying yourself a salary. Something that will be subject to income tax at the normal rate. 

If your goal is to use your rental income as your primary form of income to sustain your lifestyle, you will need to consider carefully which option offers greater tax relief.

Independent Broker Support

Determining whether buying real estate through a limited company is right for you means first conducting a series of complex calculations. There are various mitigating factors that can affect the affordability of both property purchase options.

Not to mention, whether you intend to let out the property you purchase, or renovate it and sell it on for capital gains.

Consulting with a reputable and knowledgeable mortgage broker at the earliest stage comes highly recommended. This will help you build an understanding of the pros and cons of both options, along with which best suits your objectives, priorities and financial circumstances.

For more information on any of the above or to discuss setting up a limited company in more detail, call anytime for an obligation-free consultation.