By Kris Billington, director
Thinking of buying a property – If you're considering buying a property, especially as an investment, one of the key decisions you'll face is whether to hold it personally or through a limited company.
So let's break it down in plain English.
1. Tax on Profits – Show Me the Money
If you own the property personally, any rental income gets added to your regular income and taxed as such. If you're a higher-rate taxpayer, that could mean up to 45% in tax. And since mortgage interest relief has been restricted, you can't knock off all your finance costs like you used to.
Companies, however, pay corporation tax on rental profits – currently at a much lower rate. Plus, they can deduct the full amount of mortgage interest as a business expense.
But here's the catch: if you want to take that income out of the company (as a salary or dividends), you'll pay personal tax on it too. So if your plan is to live off the income, the benefit might not be quite as shiny.
2. Tax When You Sell – The Capital Gains Conundrum
Sell the property for a profit and you're looking at Capital Gains Tax (CGT).
If you own it personally, you get a tax-free allowance and the tax rate depends on your income and whether the property is residential. For companies, no tax-free allowance – just straight-up corporation tax on the gain. There are also a few quirks in how gains are calculated, so it's not apples to apples.
The 'right route' often depends on your endgame – whether you want to build long-term value within a company or keep things simple and cash out directly.
3. Mortgages – Not Always Straightforward
It's generally easier (and cheaper) to get a mortgage in your own name. Limited company mortgages can come with higher interest rates, fewer lender options, and more hoops to jump through. Most lenders will ask for a personal guarantee too – so you're still on the hook, even if the property is in a company.
4. Admin – More Paperwork, More Problems?
Running a company means more admin. Think annual accounts, corporation tax returns, confirmation statements, record-keeping – the full works. If you already run a business, it might be second nature. But if not, factor in the time and cost. It's not just buying a house – it can be like running a mini empire.
5. Inheritance Planning – Looking to the Future
Here's where company ownership can shine. Shares in a company are easier to gift or pass on than bricks and mortar, giving you a bit more flexibility with succession planning. But – and it's a big but – there are still tax implications, so don't go handing over the reins without some proper advice.
So... What's the Answer?
It depends. (Sorry – I know that's not very satisfying.)
If you need the income now and want to keep things simple, personal ownership might be your best bet. If you're reinvesting profits, planning for the long-term, or thinking about inheritance, a company structure might be the way to go.
Still unsure? That's exactly what we're here for.
Get in touch if you fancy a chat – we'd love to help you make the right call.