The pros and cons of investing through a limited company

Up until 2015, holding a property portfolio through a limited company was a very niche way of doing business.

Since 2015, however, it has been increasingly popular. Mortgage activity is on the increase in the UK property market and according to figures from mortgage brokers, up to 80% of new mortgage applications are now for limited companies.

The reason for this change is obvious; changes to the tax structure have prompted many buy-to-let landlords to review how they do business.

Even though certain sections of the media have touted the limited-company structure as the “landlord loophole” which will allow buy-to-let investors to reduce their tax burden significantly, as is often the case in life, there is nuance and it pays to understand it.

The advantages of limited companies

In spite of what newspaper headlines often suggest, the main advantage of using a limited company to purchase property isn’t tax, although there is some benefit when it comes to tax.

If you purchase an investment property as an individual, the profits will be included as part of your overall earnings and will be liable for income tax. If the property is held within a limited company however, the profits will be subject to Corporation Tax. Corporation Tax is usually much lower than the rate of income tax, which could result in a generous tax saving.

Investors should be very clear about the fact that HMRC may challenge any action which has clearly (or even apparently) been taken purely for the purpose of reducing a tax bill (and can do so years down the line when the individual in question may be retired and on a much lower income).

Instead, the main advantage of using a limited-company structure is the flexibility it offers, particularly with regards to when income is taken and how it is distributed.

It can also help with estate planning. Essentially the limited company structure makes it possible for investors to channel monthly rental payments into a company and then withdraw income from the company when it best suits them.

They can also gift shares in a company to family and friends, thus providing a straightforward route to sharing its benefits both during the investor’s lifetime and after their death.

As an added bonus, dividends paid to those on lower incomes will be taxed at their rate rather than the investor’s and shares gifted to other people will lower the value of an investor’s estate and hence their eventual IHT burden, but again, these are useful extras rather than reasons for making the change.

Mortgage interest is also favourable if the property is held within a limited company. As of April 2020, mortgage interest is not allowed as an expense for individual property owners; however it can still be treated as an expense if the property is held within a company.

The disadvantages of limited companies

There are two main disadvantages to limited companies.

The first is that they are expensive to set up (and also require the investor to jump through some administrative hoops).

In this context, it’s important to be clear about the fact that the cost (and administration) of setting up a limited company is only part of the story, at least if you already own property and want to transfer it into the company.

You will then, essentially have to sell your property portfolio to your new company (at a fair market-rate) and pay all associated costs including taxes.

The second is that they can be cumbersome (read time-consuming) to manage, especially if you wish to use mortgage financing as the range of mortgage options for limited companies is (currently) much smaller than the range available to private individuals and, rather ironically, you may find that you, as a private individual may need to act as a mortgage guarantor for your limited company.