Buy-to-let properties – Limited Company vs Personal Ownership
We’ve all watched Kirsty and Phil on the box and thought to ourselves, ‘Wouldn’t it be great to get into property…’. Entering the buy-to-let market doesn’t seem too tricky and starting your own property portfolio could look like a very tempting proposition.
But is it really as easy as you might think?
As with all big financial investments, there are some really important questions you need to answer before you dip a tentative toe into the choppy waters of property investment.
So we’ve pulled together the main issues you’ll be faced with, along with the big considerations you’ll need to look into.
Do you go for limited company or personal ownership?
So, you’ve decided to dive in head first and set up a buy-to-let property portfolio. You’re now faced with the choice of owning these properties personally, as a private individual, or creating a limited company that will own these properties as a business concern.
And tax could be one of the deciding factors here.
If you own your properties personally, you’ll pay tax on any earnings at your own personal tax rate. And this could mean being taxed at the highest rate of personal income tax – currently 45%.
On the flip side, if you own these properties through a limited company, you could be eligible to pay corporation tax on any earnings, which is currently set at the much lower rate of 20%.
So, what’s the catch of going for the limited company option?
Well, some mortgage companies may not lend to a limited company. Or they may charge you an administration fee for taking out the mortgage as a company. And a mortgage lender will undoubtedly want to see a lot of paperwork and financial information regarding your company before they’re willing to lend you the required reddies.
Its horses for courses, but having a good estimate of your earnings will definitely help.
Focusing on your profits
The key to deciding between a limited company and personal ownership will be the projected profits from your buy-to-let properties.
You’ll need to ask yourself what level of profits you’re likely to make from the property business. And you’ll need to factor in any allowable expenditure, like mortgage interest, wear and tear on furnished properties and repair costs, for example.
If your overall rental profit is less than £300,000 in the tax year, then your limited company would only pay 20% tax on these profits.
So there’s a clear tax advantage to the limited company option, as long as you can meet your mortgage provider’s requirements and don’t exceed that £300,000 profit limit in the year.
Buying and selling properties
Are you thinking of buying more properties over time? If so, you’ll need to build up your reserves (profits) to use as deposits on any new purchases. Going for the limited company option lets you squirrel away more into these reserves, as you’ll be losing far less in tax at the lower 20% corporation tax rate.
But if you’re looking to sell, then the personal ownership option does have the advantage of the annual exemption from Capital Gains Tax (CGT). This exemption is set at £11,000 at the moment, so if you’re a couple and own the property jointly, that’s £22k of gains you can make before paying any CGT.
A company doesn’t get this exemption and would pay CGT on all of its gains. And you’d also have to pay a CGT charge as and when you wound up your company – so, you’d actually end up being taxed twice on these gains. Ouch!
Are you in it for the long term?
You might be viewing your properties as a long-term investment. And it may be that you’ve no intention of selling them any time soon, once you’ve built up the portfolio.
If you’re in this for the long haul, the limited company option could well work in your favour.
For a start, you have complete flexibility in terms of paying dividends from the company. If you don’t want to pay out, you can keep those funds back as reserves to use when buying other properties through the company.
And if you do decide to close down the company, you could benefit from Entrepreneurs’ Relief. That would mean you paying CGT at only 10%, compared to the 18% or 28% you’d pay on any personal earnings.
Keeping it simple
Simplicity can be a real advantage when you’re looking at how to set up your property empire (and who knows, in time it could be an empire…today, Stockport…tomorrow, the world!!)
Things can be confusing and messy if you have multiple properties owned by more than one person. If a third person wanted in on the deal, or you wanted to add family members, the limited company is a much better option than personal ownership. Companies are limited by their shares, so the shareholders are the property owners. This makes it much easier to add new shareholders and to have all this info properly recorded at Companies House.
A point that’s worth noting… If your company got into any financial or legal difficulties, your property would be at risk. Your personal assets would be safe, as they’re covered by your limited liability status, but your properties are an asset of the company, making them at risk if you do get into financial trouble.
Running a property company could cost you more in the short term. As a limited company, your overheads would be greater, in part due to the increased accountancy fees you’d be paying to meet the compliance requirements for Companies House and HM Revenue & Customs (HMRC). But these costs would be outweighed by the tax savings you’d make and the additional flexibility of a limited company structure – so it’s swings and roundabouts.
Existing company vs new company
Should you keep your property in an existing company, or set up a new company solely for property purposes? As always, there are few things you need to think about.
It could be that a mortgage company will look more favourably on lending to a limited company with several years trading history. Or it could be that the lender wants to see evidence of the shareholder’s earnings and personal tax returns. If it’s the second option, there’s really no benefit in keeping an existing company.
If you were thinking of pooling two or more businesses into one limited company, you need to be very careful indeed. You need to make absolutely sure that no-one’s losing out from a tax or legal perspective when this move takes place.
For example, if you decided to part company with any of your business partners (and it does happen) you need to make it as easy to do so, and as fair, as you possibly can do. Also, if your prospective business partner closes their existing company to join yours, they’ll be hit with CGT charges – and you won’t.
So, there’s plenty to think about if you do decide to go for a new company.
Get the right advice
As you can see, becoming a property mogul is not quite as easy as the TV shows might make you think. It can be a complex business and one where you’ve got to think extremely carefully about your tax and legal position.
If you’re thinking about putting your money into bricks and mortar, come and have a chat with us first.
We’ve got plenty of experience of the property market and can help you avoid the common pitfalls and set up your portfolio in a structure that works for you and your business partners.
Drop us a line and we can sit you down with a nice cuppa to talk through your plans for world property domination.