For higher rate taxpayers, buying an investment property through a limited company can have numerous benefits. If you are considering setting up as a limited company as opposed to applying for a personal buy to let mortgage, you can take advantage of lower tax rates and limited liability. This can make owning and renting out a property even more beneficial than if you were doing this as a sole trader or partnership. If you are about to buy your first investment property, here are some reasons why you should consider incorporating as a limited company first…

Benefits of buying an investment property as a limited company

Corporation tax vs. income tax

If you own a property in your name, profit made from renting this out will be treated in the same way as any earnings from a normal job, so income tax will be applied. If the property is owned under a limited company instead of your name, rental income profit will be charged when paying corporation tax. As this is around half the rate of income tax, you will be making a significant tax saving. You should also remember that if an existing property is transferred to a limited company, you will be liable to pay capital gains tax (CGT) and stamp duty tax and you would need to pay yourself a salary or dividend to access rental income.

Mortgage interest

Until April 2017, you were able to deduct mortgage interest and other associated costs before determining taxable profit. Now, it is the case that if you are an individual investing in property, mortgage interest is no longer counted as an allowable expense. You may end up having to pay significantly more as they are no longer deducted from your taxable profit. Private landlords receive a tax credit equal to 20% of their mortgage interest payments. If you are to buy a property in your company name, mortgage interest is still counted as an allowable expense, so you can avoid being hit with this higher tax bill.

Limited liability

When setting up a limited company to invest in property, just as in any other sector, you will have limited liability. Limited companies are classed as separate legal entities and so offer more protection to landlords. This means that if your company gets into trouble, you as a director will be protected from losing personal assets such as the home that you live in. Although banks will often be less willing to lend to you due to the increased risk, so you may notice the interest rates are higher than they would be for a personal mortgage. You may also need to provide a personal guarantee.

Inheritance tax

If you are a landlord and owner of multiple properties, you may be planning to pass your portfolio down to your children or any other family members after you have gone. Purchasing through your limited company can allow you to avoid large inheritance tax bills, as you can simply make your family members shareholders in the company.

Incorporating as a limited company can allow you to take advantage of these benefits, however it is important to remember that there are numerous responsibilities involved with this, such as registering with Companies House and keeping your records up to date. If you decide that this is the right choice for you, our expert team at Omer & Company can offer their support. Our complete accounting services offer property investors assistance managing company finances and submitting annual returns on time. We can also provide advice to help you become more tax efficient. To speak to our team, call us on 020 8850 0700, or email to find out more.