One of the benefits of having a limited company is that it classes as its own legal entity. This means that, unlike other company structures, limited companies can purchase property in the business’s name rather than yours.
It’s one of the reasons that some people would prefer to register as a limited company over a sole trader.
If you’re thinking about purchasing property, whether you’re looking for a place to expand your business, expanding your portfolio or investing – we’ve got the answers to some of the most common questions on buying property through a limited company.
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Do you have to be a limited company to purchase a property?
Yes, and no. If you don’t have a limited company, you can still purchase property for personal or business use. However, you will need to do so under your own name, which means that the rent or mortgage will be calculated based on your own personal finances, not your business ones.
If you want to purchase property through your business, you must have a limited company. This is because, unlike other company structures, limited companies are incorporated companies that class as their own legal entity. Therefore, they can legally enter contracts, purchase property, and gather debt.
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What property types can you buy through a limited company?
Limited companies can buy any type of property, for a variety of purposes. This could include:
- Commercial properties to use for your business purposes, like warehousing space, a store, an office, a studio, etc.
- Residential properties as an investment, such as the house that you live in.
- Residential or corporate properties to rent to others.
If you plan on buying properties to rent out, you will need to apply for a buy-to-let mortgage, rather than a regular mortgage.
What’s a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage designed for people (or limited companies) that are buying properties with the sole intention of renting them out. It’s kind of in the name.
But what buy-to-let mortgages mean in principle is that the amount you borrow, and the rate that you get, depend on the amount of rental income that you expect to earn from tenants.
In addition, the interest rates and deposits needed are generally higher than a personal mortgage – and it can be harder to find a lender.
How much deposit will a Limited Company need for a buy-to-let mortgage?
Buy-to-let mortgages tend to have a higher deposit than personal mortgages, with 20-25% as the current norm for a deposit. Like with other mortgages, though, the higher the deposit you can offer, the better rates you will receive. So, it’s generally a good idea to put as much down as a deposit as your business can afford.
With buy-to-let mortgages, the lender will also perform stress tests around your finances to ensure the rent stacks up against the mortgage rate.
To get a better idea of buy-to-let rates and affordability, it’s a good idea to use an online buy-to-let calculator tool for rough estimates and guidelines, like this one from Barclays. It is worth noting that these work on averages and current guidelines for that particular bank or lender, so don’t take the information presented as gospel.
What are the tax benefits of buying property through a limited company?
It’s all about tax (of course!).
Buying property through a limited company can have more tax relief than buying personally if you are buying to let.
Let’s say that Stev is purchasing a property in London, which creates 4 individual flats. It’s in a great central location, with a surprising amount of space. He has tenants already lined up and bags packed to move in.
If Steve purchased this property in his name, the money he makes from rent would be taxed as income. The rate this is taxed depends on how much Steve earns per year. If his earnings is less than £50,270, he will be taxed 20%. If it’s between £50,271 and £150,000, he will be taxed 40%. And anything over £150,000 will fall under the additional tax rate of 45%.
|£12,571-£50,270||Basic Income Tax rate at 20%|
|£50,271-£150,000||Higher Income Tax rate at 40%|
|£150,000+||Additional Income Tax rate at 45%|
Anything under £12,571 is tax-free. If you want to know more about personal income tax, read our guide to paying tax as a sole trader.
If Steve was planning on only owning one small property and not working anywhere else – this income might fall under the tax-free allowance. But the more likely scenario is that he, and other landlords, will be losing between 20-45% of rental income on tax if they purchase the property personally.
However, limited companies don’t pay income tax. Instead, they are liable to Corporation Tax, which is a fixed percentage of 19%. Less tax paid = more profits for you. Moreover, limited companies can also class the interest charges on their mortgage as a business expense – allowing them to deduct the cost from profits before you pay corporation tax. Since 2017, private landlords cannot do this option.
Just bare in mind that all profits will belong to your company – so you will have to pay tax on anything you withdraw via a salary or dividends.
As well as the tax benefits, owning a property through a limited company can also allow you to pass on property to family members without paying inheritance tax, provided that they are also shareholders in your business.
Do you have to pay stamp duty as a Limited Company?
Unfortunately, yes. Although buying property through a limited company can offer some great tax relief, it doesn’t eliminate every expense that comes with purchasing property. That means that you will still be liable for paying stamp duty. I wish we could deliver a better response here (get it, like delivering a stamped letter?).
Can you transfer personal property to your business?
No, you cannot transfer property to a limited company. Instead, you must sell your property and have your limited company buy it from you. This means you will be liable for all the costs of selling and buying properties, such as stamp duty, capital gains tax and legal fees.
So for many people, it doesn’t really make financial sense to sell personal property to your limited company. However, your accountant will be able to go through your unique circumstances to help you assess whether it is worth selling your property to your limited company or not.
Pst, if you don’t have an accountant yet, we’ve reviewed the best online accountants the UK offers. Find our top picks of online accountants here.
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How do lenders assess your income when buying as a limited company?
If you were to buy a property personally, mortgage lenders would use your income, financial records and credit score to see what you can afford and what rates that can be offered. Buying property as a limited company works somewhat in the same way.
Mortgage lenders will look at a business’s financial records, as well as individual income within the company to see what is affordable and what rates can be offered. Some lenders have a requirement for a minimum income and need a personal guarantee before a mortgage can be agreed upon. This is a way to prove that if anything goes wrong with your business (i.e. you fold the company), they have a way of receiving mortgage repayments.
What are the downsides of buying property through a limited company?
The biggest downside of buying a property through a limited company is finding a mortgage lender. Buy-to-let mortgages have higher rates and deposits than regular mortgages, and some lenders may want you to enter into a personal guarantee before they agree to lend to a limited company.
In addition, although limited companies do have better tax benefits on any income that you’ve generated on properties – you will still face tax when deducting this income from your company via a salary or dividends.
Not set up your limited company yet?
If you want to purchase property through a limited company, you need the limited company in place before you buy. But this is a relatively simple process to go through – and we’re on hand to guide you through the whole process.
- To start your business from scratch, discover our guide to forming a limited company.
- If you’re already running a business as a sole trader, find out how to transform from a sole trader to a limited company.
If you want to make the experience as easy and seamless as possible, you’ll be interested in our reviews of the top company formation agents in the UK.
Top-Rated Company Formation Agents
|Formation Agent||Cheapest Package||Add On Services||Our Rating||Review||Official Site|
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Using a formation agent means that you won’t have to deal with any of the paperwork yourself, and you can speed up the entire process to get your business up and running as quickly as possible.