Limited company for property investment

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A limited company is an official term that is used to describe a business that is set up with the government and may have shareholders that oversee the development of the business. This process allows you to operate a property business outside of your personal name where the business does not impact your personal finances. A limited company may also be called a limited by shares company.

When a business like this is set up, the owners aren’t liable for the expenses of the business as they will have limited liability for the finances of the company. If the company enters a period of financial uncertainty, the personal income of the business owner or the shareholders will not be affected.

investing in a property through a limited company

What does a property investment company mean?

Property investment companies are limited companies that are purchased with the intention to make money on these properties over time. If an investor buys a property with the intention to fix it and flip it in the near future, this is not classed as a property investment company.

A good example of one would be if there is a five to ten year plan for the portfolio and the buyer of the portfolio buys the limited company absorbing all of the costs associated with the business. This means collecting the rental income, paying the mortgages and looking after the tenants.

If a landlord buys a portfolio of tenants with a tenant in situ in this way, they will also have to make sure they issue a section 3 notice which informs the tenant that there has been a change in landlord.

How to set up a property investment company

The process of setting up a property investment company is similar to just setting up a limited company. you will start by opening up the company with companies house on the government website. After you have done this you may choose to add in any shareholders and what percentage of company earnings shareholders are entitled to through dividends.

Adding in additional people to the business is not a mandatory step in the process of setting up a limited company so this is why a property but this is the difference between a “property investment company” and just a “limited company”.

What is the reason for setting up a limited company to make a property investment?

The reason why most people choose to start a limited company to buy and invest in property is different for every individual. Some are drawn towards a limited company as they expand their portfolio whereas others look for the legitimacy of starting a company as this is seen as more credible. 

Below are some pros and cons as to why some landlords choose to go with a limited company when they set up their property business. The most obvious reason that comes to mind is for tax purposes as there are different rates of income tax that have to be paid in a limited company.

However, there are a few other reasons and even though these tax benefits only come into effect once you earn over a certain amount, some landlords choose to go with a limited company even though they aren’t earning above the threshold yet.

Tax avoidance for landlords who invest in limited compaies

Advantages of opening up a limited company for property

Firstly, looking at the good things to do with limited companies, a lot of the pros are based around the benefits for the business. To make sure a business thrives, regardless of if the property is bought in a limited company or a personal name, the right questions should always be asked when you buy a house and you should do your due diligence on a property with a property viewing checklist.

This is understandable as a property business cannot function without the numbers of the business adding up and the owner being able to pull some profit from the investment to make it worth their while. So, advantages of placing a property portfolio in your personal name include:

Improved tax efficiencies and planning

If the property is owned personally in the UK, rental business profits are taxable. Holding the property in a corporation, however, may result in less tax being paid on the company’s income. This is due to the fact that the corporate income tax rate, which is now 19%, is lower than the individual income tax rate range of 20% to 45%. Additionally, firms are not subject to restrictions on tax relief for borrowing costs, but individuals are.

For instance, if someone was holding a property as a corporation rather than as an individual, the corporate tax rate they would be charged is 19% which is more than the income tax rates of 20%, 40%, and 45% for basic, higher, and additional rate taxpayers, respectively.

This comparison becomes less dramatic in 2023 because the corporation tax rate will increase to 25% in April 2023. Overall, holding a property in a company can result in a lower tax rate overall as a company may be able to roll over any loss in profits to the next tax year, leading to increased profits in the long term.

Portfolio expansion

When expanding a portfolio it may be wise to open up a new limited company but this is dependent on a few factors. A company can only be set up as a limited company if the lender that you are using to finance the property purchase requires it. 

As an example, if you bought a house with a residential mortgage and you decide to rent the property out with a tenant in situ and transfer the property from your personal name to a limited company, this may be against the terms of the residential mortgage. To get around this, first of all, it is recommended to speak to your lender about this transition but remortgaging a property may also be an option too.

In order to expand a portfolio, you may want to set up one limited company for every new property purchase you have. This would separate the property’s liability from each other and ensure that if a property was to go bankrupt you would not have to use the income from another property to cover costs.

This means if you have a sinking property business it does not have to impact your whole portfolio. This is essential if you have partnered with other people in order to do a property deal as you wouldn’t want to have your own personal property finances impact the finances involved with another deal.

In this sense, things like joint ventures are perfect to be set up in a limited company as it clearly lays out what shareholder is entitled to and what percentage of the profits are produced from the property business.

A sign showing the acquisition of new properties to grow a portfolio

Perceived as more trustworthy

If you set up a limited company for a property, some tenants may prefer to deal with housing like this rather than if the property was in a landlord’s personal name. This is because established businesses tend to have more support and credibility. If you have a property in your personal name, it may give the perception that you are just starting off as a landlord and the service tenants get will be poor.

Likewise, some letting agents and property managers will also choose to only work with landlords who have a property in a limited company as it shows they are taking their business more seriously and it may be company policy to work with those who are less likely to make mistakes and consistently be able to make payments on time.

Disadvantages of opening up a limited company for property

It is not all good news if you set up as a limited company, based on your individual circumstance, you may prefer to set up in your personal name based on the below disadvantages of having a property in a limited company or perhaps delay or consider alternatives to property:

No capital gains tax allowance

Capital gains tax is charged when a property is sold and the value of the house or flat has appreciated in value. The difference between this value and the sold price is what will be charged tax. If you sold a property in your personal name, you would be able to benefit from some tax relief.

For instance, if you have a residential property that you are selling, there is usually an 18% or 28% capital gains tax that has to be paid depending on what tax band you’re in. However, if this home is your main place of residence and you plan on transferring it to a limited company in order to use it as an investment, there is no tax that needs to be paid.

There is no such tax exemption apart from the Business Asset Disposal Relief which is in place to allow business owners to sell the contents of a business at a reduced rate. So, things may be able to be balanced out here.

Dividend taxation

Dividend taxation is what is charged if you own shares in a company. Some dividends are able to be paid out tax free but over the threshold of £2000, dividends will be charged at a basic, higher or additional rate of tax based on your income tax band. You can read the government website at this link if you’re unsure of these rates.

This is a taxation that is not available if you take a property into your personal name so it has to be thought about if you plan on paying yourself a salary from a corporation.

It is also a common reason why people prefer to invest in a pension instead – for tax benefits.

Mortgage rates

Buy to let mortgage rates can increase if the property is bought in a limited company rather than a personal name. This will vary between lenders but typically, a lender will charge an extra 1% in interest rate for a mortgage in a limited company as opposed to someone keeping the same property in their personal name.

This is because the higher the interest rate is, the more lenient the stress test is that a lender applies to a property and limited companies tend to have more lenient stress tests as they are seen as less risky. A mortgage in a personal name usually is approved if the rental income of a property is around 140% whereas for limited companies this is as low as 125%.

mortgage rate changes in a limited company

What is the process involved in buying a property through a limited company?

In order to buy a house through a limited company, you would have to sign up for a corporation with companies house. In order to make sure your business is legitimate, deciding on the following points would be essential before you sign up on the government’s website:

  • A company name
  • A registered address
  • Who the company director is
  • Who the shareholders of the property are

After you have done this thought process, head over to the government’s website here to begin the process. Once this is done, you should have a Standard Industrial Classification (SIC) code which classifies what your business is. This code is useful for legal professionals to identify your company as a legitimate business.

Is it still necessary to pay for stamp duty in a limited company?

Yes, and the same goes for transferring a property from a personal name to a limited company as this is still classed as a transfer of an asset. Nonetheless, there are exemptions if you are a first time buyer but this is not possible to do in a limited company anyway.

Other than this, stamp duty is paid on anything valued over £250,000 at 3% and goes right up to 15% for the most expensive properties on the market. Check out our article about stamp duty and land tax to learn more about this topic.

To conclude

All in all, limited companies are a viable route to take if you are a landlord looking to benefit from tax reliefs at a higher rate of tax, present your property portfolio in a more professional manner or take advantage of lower stress tests. Nonetheless, the additional paperwork and headache required means it may not be worth it for a landlord to start a limited company if they are new to investing or managing property.

If you are still confused after reading this article, read up on how to buy a property and buy to let mortgages or read our articles on how rental income or rental yields work.

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Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.


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