How should I own property – personally or through a limited company?


Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

The majority of investors have tended to own their property portfolio in personal names because it’s beneficial for them to do so when it comes to selling the property.

Also, given that some buy-to-let lenders may not lend to limited companies, personal ownership may be the preferred or the simplest route when it comes to lending. However with the current trend of investors moving towards limited companies, buy-to-let lenders may need to respond by opening up their product range to limited companies.

However the changes to the treatment of mortgage interest introduced in the summer 2015 budget are going to result in a lot more investors operating via a limited company in future.

There are significant tax traps when transferring established portfolios to companies – see Enterprise Tax – tax planning for landlords.

Therefore getting the ownership right could make a huge difference to the amount of tax paid over the lifetime of the property business.

Why might landlords want to use a limited company?

From a purely financial perspective, there are three main reasons why you might want to hold property as a company rather than personally.

1. Tax treatment of profits
If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed to income tax when earned. If instead you hold the property within a company, the profits will be liable for corporation tax instead.
The rate of Corporation Tax for small companies is currently 20% (reducing to 18%) which means your tax liability is halved compared to if you are paying income tax at a rate of 40% or higher.

You may still be taxed on the dividends if you take profits out of the company, but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members or just leave the profits rolling up within the company to buy the next property.

2. Tax treatment of mortgage interest
As of April 2020, mortgage interest will no longer be an allowable expense for individual landlords. Instead a maximum of 20% relief will be claimed via the individual’s tax return meaning large increases in personal tax bills are looming large on the horizon.

Loan interest will continue to be fully allowable for companies that hold property offering a significant tax advantages. This change is being phased in from April 2017.

3. Opportunities to mitigate inheritance tax
Unlike trading businesses Business Property Relief is not available to companies which are “wholly or mainly in dealing in securities, stocks or shares, land or buildings, or in making or holding investments” – ie a property investment business – therefore a nasty 40% inheritance tax bill.

When property is held within a company, appropriate planning can be implemented to mitigate the effects of Inheritance Tax – see Enterprise Tax – tax planning for landlords.

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