Benefits of Purchasing Properties Through A Limited Company

Introduction

In recent times, purchasing properties through a company has become the new norm for many investors. With modifications to legislation and tax changes post 2015, coupled with the impact of Brexit and Covid-19 pandemic still being felt in 2021, it is no surprise that many investors are searching for alternative methods of investing.

Incorporation, which is the practice of purchasing property through a limited company, is on the rise. According to the National Residential Landlords Association (NRLA), nearly 38% of landlords in the UK considered the process just last year alone.

In this article, we shall discuss what it means to buy a property through a company, the benefits, as well as things to consider before making that big investment.

What Does It Mean To Purchase A Property Through A Company?

Purchasing a property through a company usually has two common meanings:

It could mean setting up a limited company for property investment.

Alternatively, it could mean purchasing a property through the services of a property investment company.

If you – as an investor – are considering the latter option, this means you will utilize the resources of a property investment company (such as those in Cardiff, UK) for your purchase. This comes with many benefits as opposed to initiating the property purchase personally. It is important to discuss about taxes before proceeding to the benefits associated with purchasing properties through a limited company.

Taxes

In the process of property investment, individual investors will have to deal with four kinds of taxes. These are income tax, capital gains tax, stamp duty land tax, and inheritance tax.

Income Tax

In the UK, those with annual incomes that range between £12,500 and £50,000 will pay the basic 20% tax rate. The income tax is 40% for income greater than £50,000, while those who earn above £150,000 will pay a 45% rate. It should be noted that taxation is done on total income and not just income from property.

Capital Gains Tax

This is a tax paid by investors upon the sale of their property; the tax is deducted from the profits of the sale. In 2020/21, the basic capital gains tax rate is 18% with the higher and additional rates paying 28% tax on their capital gains.

Stamp Duty Land Tax ( LTT in Wales)

When purchasing property through a company, stamp duty is tax paid on the purchase price of the property. This is one of the most prominent taxes to change in the past year. Most recent rates in Wales are charged at 4% for purchase price bands up to £180,000 and increase in increments up to 16% for purchase property bands over £1.5 million.

Inheritance Tax

If the investor in question aims to leave the property as a legacy for their children, inheritance tax could be quite high, with rates of 40% for properties that exceed £325,000. In the case of married couples (or people who are in a civil partnership), the threshold is combined. This implies that taxation will only affect property prices beyond £650,000.

After establishing the current taxation rules, we can now explain the benefits associated with purchasing properties through a limited company.

Benefits Of Purchasing Properties Through A Limited Company

The fundamental reason why investors choose to purchase properties through a limited company is tax-related benefits. There are other practical reasons why they choose this route too:

Save Money On Profit Taxes.

This is perhaps the biggest reason investors choose to purchase properties through limited companies, which has to do with how income is taxed in a company. While individual investors will pay income tax, ranging from 20 to 45%, the profits held with a limited company will only be subject to Corporation Tax.

This is very significant because corporation tax rates are far lower than income tax, which helps the investor to save a huge amount. Corporation tax is currently at 19%, which makes a huge difference when compared to the (40 – 45%) rates some investors may have to pay.

However, taking the money out of the company is not as straightforward as pocketing the cash. The investor can choose to redeem their finds through dividends – which is also taxable. Even with this, getting access to corporation tax saves money when compared to income tax.

Sustained Access To Mortgage Tax Relief

Due to the tax changes in the UK in April 2020, many landlords and investors are unable to deduct mortgage expenses from their rental income. Currently, tax credit are given to individuals based on 20% of their monthly mortgage interest payments. Fortunately, this is not so for companies.

Mortgage interest payments can receive 100% tax relief against rental income. This is because the interest is classified as a business expense, hence it is fully deductible from the income made. If you are considering buying properties through a limited company and will need a mortgage, the tax reliefs might prove beneficial for you.

Reduction In Inheritance Taxes

If you intend to purchase properties with the aim of leaving behind a legacy for your children, it might be practical to invest through limited companies. This is because properties held by a limited company provides numerous ways to mitigate inheritance tax. You will have access to trust structures, shares and numerous other methods that will not be accessible when investment is done as an individual.

Save Tax Through Multiple Shareholders

One benefits associated with investing through a limited company is sharing company profits among multiple shareholders. This is worthy of note as you can leverage on multiple tax allowances that each individual has.

Better Loan Potential

Investors generally aim to invest in more properties in subsequent years. While this may be a good plan to increase income, it could also be expensive. In order to deal with this, you can use your expanding assets to your advantage when trying to get new loans.

If you have run a successful property business with strong investment track record, lenders are more likely to offer the best rates possible. This is something an individual investor may struggle to get.

Things To Consider Before Investing.

Before going ahead to invest through a limited company, it is advisable to consider certain goals to see if the method suits you.

How much income will you earn? If your income falls into the higher income tax range, you might want to consider investing through a company to leverage in lower corporation tax rates.

What do you intend to use the rental income for? If you want to use the income you generate to buy more properties, investing through a company might be a good idea.

Do you need to use a mortgage? If yes, you might need to consider investing through a company.

How much cash do you have?

What are your goals? Is it to resell the property of leave an asset for your children.