Buying Property: Individual Ownership vs. Limited Company

When deciding to purchase property for letting purposes, both new and seasoned investors face a crucial decision: should they buy as individuals or through a limited company? Each approach has distinct legal, financial, and tax implications that can significantly affect the profitability and management of the investment.

Individual vs. limited company ownership: key differences

Buying a property as an individual

Purchasing property personally means the property deeds and mortgage are in your name. You are directly liable for any debts and legal issues that might arise. Income from rental properties is taxed according to personal income tax bands, and capital gains tax is applicable upon selling the property. You can calculate your profit by deducting your allowable expenses from your rental income. This amount will then be subject to income tax at your standard rate.

Buying a property via a limited company

Alternatively, buying a property through a limited company establishes the company as a separate legal entity that can own assets including property. This structure offers limited liability protection, meaning personal assets are safeguarded against business debts or legal issues. The company requires more administration and itself is subject to corporation tax on its profits, which can differ from personal income tax rates. You would need to set up a limited company or property special purpose vehicle (SPV) so as to own the property and the company entity would own the property instead of the individual.

Tax implications and benefits

Choosing the right purchasing structure involves understanding the tax implications of each option and the advantages and disadvantages of purchasing a property via a limited company vs an individual. Below are key considerations:

• Stamp Duty Land Tax (SDLT): Both personal and limited company purchases may incur a 3% SDLT surcharge on additional properties.
• Capital Gains Tax: Individuals enjoy a tax-free allowance, with rates dependent on their income tax band. In contrast, companies pay a flat corporation tax rate on all gains.
• Income Tax vs. Corporation Tax: Rental income for individuals is taxed according to progressive income tax rates. For companies, it’s taxed at the corporation tax rate.
• Inheritance Tax (IHT): Similar rules apply to both, but the structuring within a company can offer more strategic planning options.

Examples of tax paid on investment property

The table below outlines the key property taxes that both private and limited company landlords need to know about:

Property investment Stage	Tax	Personally Owned	Limited Company
Buying	Stamp Duty Land Tax	3% surcharge	3% surcharge
Selling	Capital Gains Tax	£0 – £6000 Tax free Gains over £6000 – Basic rate taxpayer: 18% Higher & Additional rate taxpayer: 28%	25% (Corporation tax) Based on pre-tax profits
Letting/ generating revenue	Income tax	£0 – £12,570 Tax free 0% £12,571 – £50,270 Basic rate tax payer: 20% £50,271 – £125,140 Higher rate tax payer: 40% £125,141+ Additional rate tax payer: 45%	25% (Corporation tax)
Estate planning	Inheritance tax (IHT)	40% above £325,000 7 year taper on gifts	Same but on value of shares held

Buying property as an individual

If you decide to invest in property personally under your name, the property deeds and mortgage will be registered to you as an individual, and you will personally pay income tax on any profits from your buy-to-let property. You can calculate your profit by deducting your allowable expenses from your rental income. This amount will then be subject to income tax at your standard rate.

Tax rates and bands for 2024/25:

The following table shows the Income Tax rates and bands for 2024/25:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

Due to Section 24, landlords are now unable to deduct mortgage interest as an expense for personally owned properties (other than FHL). That means that those who fall under the higher or additional rate tax bracket will now have to pay an increased amount of tax. There is now a (20%) reduction from your tax liability for mortgage interest payments and other financing costs, such as mortgage broker fees.

Buying property in a limited company

If you choose to buy a property through a limited company, you own the shares in the company and the company owns the property asset. The company will hold the mortgage, and pay corporation tax on any profits made.

In calculating the company’s profits, you can deduct the allowable expenses from the rental income, just as you would for other types of property ownership. However, in a limited company the entire mortgage interest payment is tax allowable, reducing the profit and consequently, the corporation tax liability.

If you choose to retain this profit within the company, such as for future property investments, there would be no further tax obligations.

Advantages and disadvantages of a limited company

Advantages of buying property via a limited company

Tax Efficiency

Lower corporation tax rates can result in significant savings and more profit, especially for higher-rate taxpayers. Instead of being taxed at your personal income tax rate, which can be costly if you’re a higher rate taxpayer, the rental profit on properties held in a limited company is taxed at the current rate of corporation tax, 25%. If you would like to take profit out of the limited company, you can withdraw dividends. Dividends are generally more tax efficient compared to paying a salary, with a tax-free dividend allowance of £500.

Financial Flexibility

As a director of a limited company you have greater flexibility and options for profit distribution via tax-efficient dividends, salaries, or reinvestments into further properties or pension without immediate additional tax. If you’ve loaned your company money, for example for a property deposit, this can also be repaid to you tax-free from your company’s available funds.

Portfolio Expansion

Retaining profits within the company can facilitate further investments into your property portfolio. This approach allows you to defer income tax payments on these retained profits and fund future property purchases, until such a time you choose to withdraw profits out of the company.

Mortgage interest relief

Mortgage interest is an allowable expense which means the company receives full relief on interest payments.

Inheritance Planning

Owning property within a limited company can provide more options for inheritance tax planning, making it easier to transfer your business to your family and future generations. Since the property remains owned by the company, it may also be shielded from stamp duty, inheritance tax, and capital gains tax liabilities, providing additional protection for your investments.

Disadvantages of buying property through a limited company:

Complexity and Costs

Setting up and maintaining a company involves more administrative work and higher professional fees.

No capital gains tax allowance

When you sell your property through a limited company, you have to pay corporation tax. You pay this on all of the profits made from the sale of the property. The amount of corporation tax owed on the profit from the sale of the property will depend on the company’s taxable profits for that year, taking into account any allowable expenses and deductions.

However, if you own property personally, you only have to pay capital gains tax on the overall gains made above your tax-free allowance of £3,000.

Double Taxation on Dividends

Profits are taxed both at the company level and then personally upon dividends paid to the shareholder. This occurs when a company pays corporation tax on its profits, and then the shareholders pay additional tax on the dividend income received from these profits.

Tax is paid on dividends received over £500 at the following rates:

Tax Band	Tax Rate on Dividends Over the Allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

Mortgage Accessibility

Mortgages for companies can come with higher mortgage rates, fees and deposits and more stringent conditions and can also be more complex. Lenders deem it a higher risk, as it involves additional legal and administrative processes and more complex considerations.

Enhanced Accounting and Record-Keeping Requirements

Limited companies must uphold accurate up-to-date financial records, recording all property-related accounts on all income and expenses. This includes everything from rental income and property management fees to repairs and costs associated with maintenance. Additionally, limited companies are obligated to compile and submit annual financial statements and corporation tax returns to HMRC. The detailed nature of this process can be both time-intensive and complex, particularly for those unfamiliar with the regulatory demands and critical filing deadlines. This can result in increased accounting expenses due to the necessity for thorough and accurate financial reporting, compliance and filing deadlines.

Deciding whether limited company ownership is for you

Your decision on whether to buy a property through a limited company ownership structure will ultimately depend on the following factors:

How much income you have?

If you’re subject to higher income tax rates and do not have the option of allocating property income to a lower-earning spouse, the significantly reduced Corporation Tax rate can be highly attractive. However, it’s important to consider that actively expanding your property portfolio might initially generate notional losses rather than profits. With careful tax planning, these potential taxable gains can be deferred until a period such as retirement when your overall income may decrease, potentially reducing your tax liability.

Do You Need the Property Income for Living Expenses?

Keeping the income within the company for future acquisitions or until your other income decreases might financially benefit you more than withdrawing it for immediate use. This strategy allows the income to potentially grow and serve larger financial goals rather than being depleted for short-term needs.

Do You Rely on Mortgage Financing?

For higher-rate taxpayers, the advantage of deducting the full amount of mortgage interest as a business expense can be an attractive reason to hold properties through a company. This deduction can significantly reduce the taxable income of the company, enhancing tax efficiency.

Who Are You Buying Properties For?

Initially, you may be purchasing properties primarily for yourself. However, it’s essential to consider your long-term plans—what is your exit strategy? Are you looking to sell these properties later to fund a lavish retirement, such as extensive travel or other big expenses? Or do you see these investments as a legacy to pass down to your children or grandchildren?

If ensuring the transfer of your property portfolio to future generations is a priority, structuring ownership through a company can be advantageous. Properly organised, this approach can offer significant Inheritance tax benefits, potentially preserving more of your estate’s value for your heirs.

Making the right choice

Deciding whether to invest in property as an individual or via a limited company depends on various factors, including tax implications, financial goals, and the scale of your property ambitions. For those managing a growing portfolio or operating as higher-rate taxpayers, the benefits of a limited company often outweigh the complexities.

Get in touch

Given the complexities involved and explained in this guide, consulting with a tax advisor is crucial in helping you to navigate the various implications and ensure that your investment aligns with your overall financial strategy. Qualified tax experts at Rayner Essex can provide you with tailored advice and planning strategies to optimise your tax status and maximise your investment returns.

Photo by Amadeusz Misiak on Unsplash