Investing in property through a limited company: the pros and cons

The number of investors opting to purchase property via a limited company is on the rise, but is it the right move for you?

Numerous surveys over the past couple of years have discovered a significant increase in so-called “professional landlords”, or those who use a limited company structure for property ownership and tax and business purposes as opposed to investing as an individual.

The latest research from Paragon Bank, for example, found that almost three quarters (74%) of landlords who plan on making a further property purchase in the coming year will use a limited company to do so. This record-high figure was also a significant leap from the 62% of respondents who had this intention in Paragon’s Q1 survey.

So what does this mean and why are people increasingly keen to professionalise their property portfolios? Investing via a limited company comes with a number of pros and cons, and not every landlord will find it beneficial.

The benefits of a limited company structure

Section 24 mortgage interest relief changes: This is the most obvious potential advantage, and the primary driver behind the rising number of limited company landlords. In the past, landlords used to be able to deduct mortgage interest and other financing costs from their income tax calculation, but since the 2020/2021 tax year, they can only claim a tax credit of 20% based on their mortgage interest amount.

For higher-rate taxpayers in particular, this has led to a much bigger income tax bill. Limited companies are exempt from the new rules, though, because they pay corporation tax based on their profits rather than income tax, meaning limited company landlords can deduct their mortgage interest payments from their tax calculation.

Lower level of tax: Corporation tax rates (paid on profits for limited companies) were 19% in the financial year beginning April 2022, while the basic rate of income tax was 20%, the higher rate was 40% and the additional rate for top earners was 45%. From April 2023, corporation tax is 19% for taxable profits below £50,000, and 25% for taxable profits above £250,000 (and amounts between this are taxed at a level between 19% and 25%). This means that for many landlords, the tax paid on property earnings through a limited company is potentially much lower than what they would have paid via income tax.

More flexibility and control: For landlords who own properties personally, any rental income made throughout the year must be declared, and the correct tax paid, minus allowable expenses. However, with a limited company, you can keep any profits made through rental returns within the company, or reinvest them. You can also draw down the profits as dividends as and when you need them from the company, although it is important to note that these amounts may be subject to income tax, which you can learn more about here.

Better inheritance options: There is a relief you may be able to claim called business property relief, which can minimise inheritance tax following a death for limited company assets. You can also make your children or other family members shareholders of the limited company, which has the potential to remove or reduce the inheritance tax bill down the line.

What are the downsides?

You might not be better off: Particularly for landlords who are basic rate taxpayers (even when taking rental income into account), there may not be any financial benefit to buying and operating property investments through a limited company. It might even work out more costly, so it is vital to seek expert advice and do the maths before considering this option. That being said, higher-rate taxpayers often find it does save them money overall.

More paperwork: If you’re a small-time landlord with one or maybe two properties, there’s a good chance you complete a lot of the paperwork and fill in tax returns yourself, rather than employing an accountant. However, as a director of a limited company, accurate record-keeping and accounting is vital, so it is more likely you will need to use an accountant or an adviser, which can be an additional expense.

It can be costly to sell: Capital gains tax applies to the profits made on the sale of any property that is not your main residence, but individuals (and couples) are eligible for a personal allowance that reduces the bill. However, limited companies do not get this allowance, so the owner (or company) must foot the whole bill when they come to sell a property.

Double taxation: Because a limited company must pay corporation tax on its profits, and then pay income tax on any dividends drawn down from the property (unless they fall below your personal tax allowance), it can mean you are taxed twice on your earnings. One way around this is to leave business profits in the company until retirement, for example, when you can ensure you withdraw an amount below your personal tax allowance.

All the points mentioned above can vary widely depending on an individual’s circumstances and preferences, so it is vital that property investors seek professional tax and financial planning advice to help them make an informed decision about entering into a limited company.