One of the most frequent questions from landlords is whether to purchase buy to let property via a Ltd Company v personal investment in their own name.

It’s a great question and there is no simple answer. It will depend on a number of factors surrounding the particular circumstance of the buyer. This includes:

  • How long the properties will be owned for,
  • When to extract the cash,
  • How much income the investor wants to extract
  • What other income sources they may have.

Whilst we are not accountants, have no formal qualifications in this area and therefore can’t offer Property Investment Tax Advice, we can talk about our experiences and how this has affected our co-founders as property developers and property investors.

Useful Property Investment Tax Tips

Before we go into any details about should it be a Ltd Company v personal investment , lets set the scene. The majority of investors buy property in their personal names because there are less hurdles to jump over.

The vast majority of buy to let lenders will only lend to people who buy properties in their own name. Therefore for those starting out, this will be the determining factor that will make the decision easy.

Buy to Let mortgages are designed for people who are earlier in their investing journey. They also can be simpler to obtain. Commercial Lenders/mortgages are more flexible in this regard, usually being available for property investment through Ltd companies, LLPs, personal names and even trusts.

Legal status of a Ltd company

So when you search on the Land Registry, the company’s name will appear as the owner rather that the individual’s.

This can be useful if you want to keep your details private. It might be useful in protecting your personal credit status against utility providers who register late payments for bills you haven’t received and other civil claims.

But owning in a Ltd company/LLP will mean you have to publish publicly available financial accounts on your portfolio. Whilst not detailed when small, it will become quite clear as the size of your company/portfolio grows and the reporting requirements increase.

Personal Guarantee – Ltd Company v Personal Investment

Mortgage lenders will often ask for a personal guarantee if you own the property investment through a Ltd company. This means that whilst you protect yourself personally from other creditors, you are personally liable for all debts to the mortgage lender. This does not change by having a Ltd Company v personal investment.

If you want the benefits of limited liability but want to use the personal tax regime, try using LLPs (Limited Liability Partnerships). This is what the Progressive Property co-founders do as it gives the best of everything.

You only need one shareholder to purchase through a Ltd company. So you can hold the only share and still be the sole owner. If you’re a shareholder, you are entitled to the share of the profit which will be paid out in dividends.

Benefit from a corporate structure with a one property portfolio

When you hold the property investment through a Ltd company you pay corporation tax. This is likely to be around 20% (17% from 2020) of the profit generated, but not drawn from the business.

The profits within the company are the only profits you will be liable to pay tax you on. For those who don’t want to draw any (or much) of the funds personally to create a personal income, this can be very useful and offers a definite advantage over owning property personally.

Re-investing your profit

If you are like the Progressive Property co-founders and like to reinvest profits to create bigger profits, the compounding effect of only paying 20% tax over time is huge. With some paying 40% tax on their rental income profits you could potentially generate a yearly tax saving of 20%. This should snowball into big numbers if consistently reinvested over many years.

When owned personally, any property income would be taxed in its entirety every tax year. This provides you with no ability to defer.

Personal use of profit from your property portfolio

The story changes if you want to draw these profits out as an income for personal use. If all the profits were drawn out in the form of dividends on a yearly basis you would end up paying around the same level of tax as if you owned the properties personally. This is because whilst Ltd Companies will pay Corporation Tax at 20%. Basic rate income tax payers won’t pay tax on the dividends they receive but higher rate income tax payers will. This means there is little difference between owning property as a Ltd Company v personal investment if you draw all the profits in dividends.

“Compound interest really is the 7th wonder of the world, and I love it!”

For those who only draw a portion of their profits from their Ltd company the snowball effect of the tax saved and reinvested could be huge in years to come.

Ltd Company v Personal Investment – Disposing of the asset and Capital Gains Tax

When you come to sell a property, rather than paying 18% (basic rate tax payer) or 28% (higher rate taxpayer) capital gains tax for properties held in your own name, the Ltd company pays 20% corporation tax. You would then be subject to the same tax on dividends outlined above for higher rate taxpayers.

Coupled with the fact that you get very little Capital Gains tax allowance, often means Capital gains is taxed lower for property owned in your own name. Currently you received around £12,000 in Capital Gains tax allowance. If you share the property with your significant other this would double to nearly £25,000 of tax free allowance.

If you sell a property every few years, we recommend owning it personally to reduce your capital gains tax bill.

Should this become too frequent however (more than 1 a year) HMRC will claim you are property trading. They will subsequently charge you income tax anyway. An important consideration when deciding whether to have a Property Investment company or invest as an individual.

Remortgaging your buy to let investment

Another major benefit of owing property personally and not doing the property investment through a Ltd company is as follows. Remortgage money is tax free.

Should you remortgage a property in your own name the cash would come to you and can be used for any purpose. No tax would be due until you sold the property.

Lets say you purchased 10 houses for £100k each, totalling £1m. Across 30 years they appreciate in value to £4M in total. You remortgage your properties over the years and take out £3M in remortgage cash. As this is borrowed money there is no tax due and these funds can be spent on whatever you want.

When you die it is only the remaining equity which is taxed (£1M in this example as long as the other funds have been gifted to others such as children or spent). This means you have avoided paying tax on the £3M you released over the years.

An amazing strategy – obviously this is an extreme example. You may want to implement it on some properties, as you will have a big tax bill should you have to sell your properties in your lifetime.

Should you own these properties in a Ltd company you would have to extract the remortgage money through salary. If your company didn’t have enough profits to support dividends at this level, this would mean huge income tax and national insurance deductions. So it wouldn’t work. A definite score to owning personally.

Capital Allowances

The Progressive Property co-founders like to claim capital allowances. These are allowances on plant and machinery items on purchases of commercial buildings. Typically you get about 20% of the purchase price of such properties offset against your personal income. This can be from any source up to the value of £50k.

So if you purchased a property for £300k you might be able to claim £60k in allowances. For someone that earns £100k a year as a salary you could use sideways loss relief up to £50k. This would reduce their personal income by around £50k meaning that they pay their income tax on £50k rather than £100k which would usually be paid at 40%.

Should you put the property investment through a Ltd company you will only be offsetting 20% corporation tax (and couldn’t offset it against tax on dividends) which is a definite disadvantage.

Personal investment vs Ltd Company?

So to conclude which is better, a personal investment vs Ltd company? It depends who you are and what you want to do.

You may have a mixture of owning properties personally, within Ltd companies and LLPs. Your decision will affect the amount of Property investment Tax you pay massively so its worth spending time on this. It is rarely worth transferring properties out of your name into Ltd companies/LLP or visa versa as you will be liable for stamp duty and capital gains tax based on the gain you have enjoyed at the time of the transfer.

If you want to change your strategy just do it for future purchases.

Its important that you consult an accountant for Property investment Tax Advice before you make the final decision as your individual circumstances such as your portfolio, other income, age etc will affect your decision.

Personal investment vs Ltd Company – April 2016 UPDATE

In the summer 2015 budget, the chancellor announced that the tax regime in relation to residential investment (and second homes) is to change. From 2017 the interest costs which are charged on the mortgage or other finance on a buy to let property will not be fully offsettable against rental income. This is a change from what has happened in previous years.

After a 4 year phased introduction the rough net affect will be that higher rate tax payers will only be able to offset around half of the mortgage interest against rental income. Basic rate tax payers are not affected by this although it is likely that this change will push many basic rate payers into the higher rate band. This means that a large number of landlords will be affected.

The good news is that these changes only affect landlords who buy properties in their own name or use an LLP to purchase. As of April 2016 Ltd companies are exempt from these changes. All mortgage and other finance costs are still offsettable against rental income within a Ltd company.

This has created a major benefit for those holding residential investment properties in a Ltd company. Because of this many landlords will be utilising Ltd companies to purchase further properties. This change doesn’t apply to commercial.

Have a question or wish to find out more? Simply get in touch with us today and a member of the team will be on hand to help.