Guide to Buying A House With Limited Company
Understanding Limited Company Property Ownership
A limited company is a legal entity registered in UK that can purchase residential and commercial properties in its name.
The company will be listed as the owner on the register of title.
The limited company is responsible for all financial activities related to a property. This includes mortgage obligations, rental income and operating expenses.
What Does It Mean to Purchase Property Through a Limited Company?
The company that owns the property will enter into the contract using its registered name and number.
A limited company mortgage for buy-to let is issued to the business, the cash in its bank account or the money that directors advance to the firm as formal director's loans.
Rental income is paid to the bank account of the business and then recorded for tax and accounting purposes.
The Legal Structure of an UK Limited Company
The UK Limited Company is an independent legal entity that was created by the Companies Act. It's registered with Companies House.
It is a separate legal entity that can own properties, make mortgages, sign leases, and take on financial obligations without the consent of its owners.
Due to its legal separation, the debts and obligations pertaining to property are the responsibility of the company. This is subject to personal guarantees provided to lenders.
The Role of Directors and Shareholders
The directors are in charge of managing the business, including decisions on property acquisition, finance, and legal obligations.
Dividends and increases in value of shares are financial benefits to shareholders.
Directors are often required to give personal guarantees by lenders when purchasing property for a limited company. This means that the directors will be personally responsible if their company does not pay the mortgage.
Why Investors Choose Limited Companies for Property
Limited company ownership is a popular choice for property investors to reduce their tax liability, improve the financing structure and increase portfolio value over time.
Landlords often use the limited company structure to invest in multiple properties and leverage mortgages. They also reinvest their profits instead of taking them out immediately.
Tax Efficiency and Corporation Tax
Rental profits are taxed by the UK Corporation Tax and not personal income tax.
After deducting all allowable costs, such as mortgage interest, repair fees, management charges, and professional expenses, corporation tax is calculated on the company's profits.
The structure is designed to benefit taxpayers with higher rates and those who pay additional tax on income from rental properties.
Separation Between Personal and Business Risks
Limited companies allow investors to separate their personal finances and property investments.
In the event of financial difficulties, the only assets that are in danger is the ones owned by the business, unless lenders have enforced personal guarantees.
The separation of the properties is especially important for those landlords who own multiple assets or have higher risk asset types, such as HMOs.
Long-Term Portfolio Strategy
Rent profits can be kept within the limited company and not taken as income.
The retained profits may be used for future purchases of property, to reduce the need for borrowing, or even cover operational costs, without incurring personal tax liability.
The structure is designed to support compound growth in the portfolio over time.
What Types of Properties Can You Buy?
Limited companies can buy residential, commercial, and mixed-use properties, depending on the lender's criteria and regulations.
Ownership structure doesn't restrict the type of property, but terms for financing vary depending on asset class.
Purchase Residential Property for Rent
Buy-to-let properties are often purchased by limited companies, such as:
- Single-let homes
- Apartments
- HMOs
- Flat blocks
Rent from residential properties is considered property investment income.
Commercial Property
Offices, retail spaces, warehouses and industrial properties are all commercial property.
Due to the VAT implications, leasing structures and business-oriented finance terms, commercial property is often purchased by limited companies.
Mix-Use Property Considerations
A mixed-use property is a title that contains both commercial and residential elements.
Mixed-use property is treated differently from residential properties and therefore requires a specialist to analyse the tax implications.
The Tax Effects of the New Budget
Rental income, capital gains, and financing costs are all taxed differently when you own property through a limited company.
The tax is first calculated at the level of the corporation, then at the level of the shareholders when the profits are withdrawn.
Rent Profits Taxed by the Corporation
Subtracting allowable costs from the gross rental income, the company determines its taxable profits.
Included in the list of expenses are full mortgage interest and letting fees, as well as repairs, insurance costs, accounting fees, and legal charges related to managing a property.
Profits resulting from the accounting period are subject to the corporation tax rate applicable.
Dividend Tax and Salary Reduction
Dividends paid out to shareholders and salaries to directors are two ways that companies extract profits from their company.
Dividends and salaries are both taxed according to the PAYE tax system.
Tax efficiency and cash flow are affected by the method used to extract tax.
Capital Gains Tax and Corporation Tax
Limited companies do not pay capital gains tax.
Any gain realized on the sale of a property will be taxed according to corporation tax laws.
Gains within an organization are not eligible for a tax-free annual allowance.
Section 24 Interest and Tax Relief
The Section 24 of the Mortgage Interest Relief Act restricts relief from mortgage interest for those who personally own residential property that is used as a buy-to let.
Limited companies are exempt from this restriction, and can deduct the full amount of interest on mortgages as an expense.
Limited Companies are Subject to Stamp Duty Land Tax
When purchasing residential properties in England or Northern Ireland, limited companies are subject to a higher rate of Stamp Duty Land Tax.
These higher rates are subject to a surcharge of 3% on the total purchase price.
Comparing Personal Ownership
Companies that are limited companies cannot qualify for the first-time purchaser relief or exemptions on main residence.
Each residential property is considered an additional asset for the purposes of SDLT.
Loans for Limited Companies
Buy-to-let products for limited company purchases are designed specifically for corporate borrowers.
The mortgage amount is based primarily on the rental income, not personal income.
Limited Company Buy to Let Mortgages
A mortgage secured by the assets owned by the firm is granted to it.
Lenders usually require that the company has a SIC code specific to investment or property letting.
Director Guarantees and Credit Checks
The creditworthiness of the directors and major shareholders is assessed by mortgage lenders.
Directors are typically required to provide personal guarantees, which makes them personally liable if their company fails.
Interest Rates and Loan-to-Value Ratios
Mortgages for Limited Companies have higher interest rates than mortgages for individuals.
The maximum loan-to value ratios range between 65% and 75% depending on the lender's policy and type of property.
Minimum Deposits and Funding Required
Deposits for limited company properties are higher than those required by owners-occupied homes.
Documentation and source of funds for deposits must be clear.
Average Deposit Percentages
The majority of lenders will require that you pay a deposit equal to 25% of your property's purchase price.
Higher-risk property types may require larger deposits.
Use Director Loans
Director's loans are personal money that directors can loan to their company.
If the records are kept correctly, director loans may be paid back to directors in the future with no additional tax.
How to Buy Step-by-Step
The standard stages of conveyancing are followed by additional corporate checkups when buying property via a limited corporation.
Set up a Limited Company
Before submitting an application for a mortgage, the company must have been incorporated with Companies House. A business account is required, as are the appropriate constitution documents.
Find and Secure the Property
Property offers are made under the legal company name. The approval of a mortgage is based upon the rental income, structure of the company, and profiles for directors.
Conveyancing & Completion
Lawyers draft contracts and conduct legal research. They also ensure that lender requirements are met. Stamp duty land tax is calculated by the business and payable at completion.
Accounting and Compliance
Companies that own property and are limited companies must adhere to UK tax laws as well as company law.
Penalties can be imposed for failure to comply.
Annual Accounts and Corporation Tax Returns
A company is required to prepare annual statutory accounting and submit a Corporation Tax Return with HMRC.
The deadline for paying corporation tax is a statutory requirement.
Accounting and Allowable Expenses
Bookkeeping accurately is necessary to track income, expenditures, and loan amounts.
The only expenses that are allowed to be claimed is those that have been incurred solely for your property business.
Tax Considerations on Property
Rental housing is exempted from VAT.
If the commercial property has been taxed, it may be subjected to VAT.
The Pros and Cons of Buying Through a Limited Company
Limited companies offer tax benefits and are strategic, but they also increase complexity.
Benefits
The advantages include:
- Full mortgage interest relief
- Profits retention
- Flexibility in inheritance planning
- Scalable growth of portfolios
Disadvantages
The disadvantages of this type of mortgage include:
- Higher costs for setup
- Increased accounting fees
- Higher interest rates
- Additional SDLT surcharge
How to Transfer Personally Owned Property Into a Limited Company
Tax purposes treat the transfer of property into a corporation from an individual's personal possession as a sales transaction.
Capital Gains Triggers for SDLT
Transfers trigger capital gains taxes for individuals and the SDLT for companies based on the market value.
The Myths of Incorporating Relief
The SDLT liability is not eliminated by incorporation.
Sell Property and Exit Strategy
Tax efficiency is determined by exit planning at the end the investment cycle.
Sell the Property
If the company makes a profit, it pays tax to the corporation.
Profits distributed to investors are subjected to a further tax.
Sell Company Shares
When you sell shares, the ownership is transferred to the company and not the actual property.
The SDLT may be reduced for purchasers.
Exit Tax Planning
The timing of the exit tax, shareholder structure and the extraction strategy all affect its outcome.
Common Mistakes to Avoid
Poor planning is more likely to cause errors than structural defects.
Poor Tax Planning
Unexpected liabilities can arise if you fail to model the extraction tax.
Awful Mortgage Advice
Non-specialist lenders may reject your application or offer you unfavorable terms.
What is the Best Way to Buy Through a Limited Company?
The structure is suitable for investors who have long-term goals and are pursuing reinvestment.
The Investor Profiles that Benefit the Most
The most benefitted are:
- Higher-rate tax payers
- Landlords with portfolios
- Capital investors
Conclusion
The choice to buy a home through a company limited is one that has a significant impact on taxation, long-term planning, and financing. It can provide measurable benefits for investors in property who prioritize scalability and interest deduction. It increases costs and complexity when used without proper planning.
At Tapton Capital, we help property investors navigate the complexities of limited company property ownership, ensuring you make informed decisions that align with your investment strategy and tax position.
Get Expert Help With Limited Company Property Finance
Speak to Tapton Capital about how we can help you secure the right financing for your limited company property purchase. Discover how we assess your situation, match you with specialist lenders, and structure funding that works for your investment strategy.
Talk to a Funding Specialist