If you want to buy a property through a limited company, you’re not alone. Many limited companies buy property, particularly for buy-to-let.
Analysis earlier this year shows that the number of limited companies purchasing buy-to-let property is on the increase. But buy-to-lets aren’t the only purchase made by limited companies.
There are many reasons why a company may buy property. As well as investment (such as buy-to-let property), companies buy commercial premises for their operations to expand. That can be factories to shops and offices.
Before we look at how to buy a property through a limited company, we’ll look at 10 reasons why a company should purchase property.
Reasons to buy property through a limited company
For some companies, renting property can be more expensive than buying a suitable site. There are also restrictions that you don’t have when owning a property. For example, you may want to expand your business and require your own building and land for a bespoke manufacturing unit. Some rented buildings can’t be altered for specific purposes.
Many property investors who are landlords who have also seen tax rises as individual sole traders. As a result, forming a limited company to purchase buy-to-let properties can be better for tax purposes.
There are many reasons to buy property through a limited company, including:
1. It’s tax efficient
Companies pay Corporation Tax on profits, currently starting at 19% for augmented profits up to £50,000 and 25% for profits over £250,000. That is considerably lower than tax paid by individuals.
Also, limited companies are better vehicles when it comes to tax planning.
2. Optimises allowances
Limited companies offer flexibility with respect to tax and sharing income. You can optimise allowances to take funds from the company.
3. Limited liability
Having a company limits your own financial risks. Should there be any unforeseen issues, your financial risk is limited to the assets and liabilities of the company.
4. Mortgage relief
Using a limited company means deducting all the finance and mortgage costs from the company’s income as a normal expense.
Are there any reasons not to?
There are benefits to buying property through a limited company. But, like most things in life, you have to weigh up the pros and cons.
1. Limited mortgage options
Lenders tend to view companies as riskier because of their limited liability. That means fewer lenders are willing to provide mortgages to limited companies. And those that are willing to lend will usually charge higher interest rates and require bigger deposits. And you may still need to provide a personal guarantee on the mortgage.
2. Stamp Duty surcharge payable
Limited companies pay an extra 5% on top of the standard Stamp Duty Land Tax on property purchases over £40,000 in England or Northern Ireland. A flat rate of 17% of Stamp Duty applies when companies buy residential property for more than £500,000.
You pay Land and Buildings Transaction Tax in Scotland if you buy property or land above a certain value. An ‘additional dwelling supplement’ is payable on additional residential properties (dwellings). The charges also apply to non-residential property purchases and leases.
In Wales, companies pay higher residential rates of Land Transaction Tax on any property purchase over £40,000.
These additional charges can make it more of a challenge to buy through a limited company.
3. You don’t get Capital Gains Tax allowance
If you sell an investment or buy-to-let property you pay Capital Gains Tax on profits. Individuals can reduce their liability by using their Capital Gains Tax allowance.
But companies can’t do that as they are not eligible for the allowance on any profit made from the sale of property.
How to buy a property through a limited company
So, how does it work if you want to use your limited company to buy property?
It sounds obvious but the company owns the property and not anyone personally, whether that’s you or any of your directors. The company, therefore, is responsible for the mortgage, taxes and any legal obligations tied to the property.
The mortgage you require will depend on the property you want to buy. For commercial premises, such as shops, warehouses, factories and offices, you’ll need a commercial mortgage. For any residential rental property, you’ll need a buy-to-let mortgage. If you have plans to buy a shop with a flat above, you require a semi-commercial mortgage.
As we’ve already noted, mortgages for limited companies can be more expensive than personal mortgages. But the tax savings can outweigh the additional costs.
You’ll also need to consider other issues, such as a deposit, which is higher than for mortgages for a home. Here are some of the areas you need to consider:
1. Set up a limited company
This sounds obvious – particularly if you already have a limited company – but you will need to set up a limited company. We’ve looked at all you need to know about running a limited company in a previous blog. It isn’t difficult to incorporate a limited company. You will need to set up a business bank account once your company is registered. That’s because everything belongs to the limited company, not you!
2. Save up for a deposit
Commercial mortgage lenders usually require a deposit of 25-40%. That’s higher than a homebuyer mortgage because it’s considered a bigger risk to the lender! Without the deposit, you won’t be able to secure a mortgage as there isn’t the number of specialist lenders are there are for personal mortgages.
3. Search for a mortgage
Commercial mortgage lenders will look at your company’s finances. Lenders also check your company’s accounts to check proof of income. They usually request two years’ worth of accounts, so if you’ve just started trading, you’ll need to revisit the idea of buying a property through your limited company later. They also check the length of any leases and property type.
4. Seek a solicitor
Like a private property mortgage, you’ll need to secure a mortgage in principal and then find a property. Once you have that in place, you can make an offer. Again, just like buying a home, you’ll need to secure the services of a solicitor to look after the legal side, including surveys, searches and contracts. The timescales can be similar, or longer, so keep that in mind.
Once you’ve done all that, you can complete your purchase. Ensure you budget. Knowing your numbers (which we always advise) is important or else you could end up overstretching your finances. Budget for legal fees, legal costs, insurance and Stamp Duty.
What should I do next?
If you want to talk more about your limited company buying a property, you can contact us today. We’re always happy to have a no obligation chat.
