Buying a property through a limited company: how does it work?

What does it mean to buy a property through a limited company?

When buying property through a limited company, you're purchasing and owning the property through a separate legal entity distinct from yourself.

In the UK, this strategy has gained traction among property investors, especially those aiming to build extensive portfolios. By holding property within a company, the asset belongs to the company, not you personally.

Investors are drawn to this approach for several reasons.

Primarily, it offers potential tax advantages, as companies may benefit from tax benefits unavailable to individuals. This structure also provides a clear separation between personal and business assets, which can be beneficial for liability purposes.

When considering buying property through a limited company, UK investors often weigh these benefits alongside their long-term investment goals.

What are the pros and cons of buying property through a limited company?

The pros and cons of buying property through a limited company are explored below. 

The advantages: 

• Tax efficiency: One significant benefit is the potential tax savings. Limited companies are subject to corporation tax on their profits, which is 19% for profits up to £50,000 and 25% for profits over £250,000. This can be more favourable than the higher income tax rates individual property investors might face. Within a company structure, mortgage interest is also fully deductible as a business expense, whereas individual owners only receive 20% tax relief on mortgage interest.
• Personal financial separation: By buying a property through a limited company, you create a distinct separation between your personal finances and your investment assets. This means any liabilities associated with the property are confined to the company, potentially reducing your personal financial risk.
• Increased flexibility in succession planning: Owning property through a limited company can simplify succession planning. Instead of transferring ownership of a physical property, which can be cumbersome and tax-inefficient, you can transfer company shares. This method can be more straightforward and may offer tax advantages when planning for inheritance.

The disadvantages:

• Additional costs: Limited company buy-to-let mortgages are rarer and often have higher rates than personal buy-to-let mortgages. Many lenders don’t offer buy-to-let mortgages to limited companies, and those that do usually require a personal guarantee from a company director, which means the director assumes personal financial liability similar to that of an individual landlord. This can add to the financial burden when buying property through a limited company, alongside costs such as accountancy and company registration fees, which typically range from £500 to £2,000 annually for a small-sized limited company.
• Complexity in management and compliance: Operating a limited company involves adhering to specific accounting and regulatory requirements. This includes filing annual accounts with Companies House and submitting corporation tax returns to HMRC. These obligations can add to the administrative burden and necessitate professional assistance.
• Capital gains tax (CGT): A potential drawback of holding property in a limited company structure is if you decide to sell your shares in the company rather than the property itself, you’ll incur CGT on the gain from the share sale. With recent increases in CGT rates on non-property gains to 18% and 24%, this may result in a higher tax bill for some investors than anticipated. 

Additionally, unlike direct property sales, you may have less control over timing and tax allowances, making CGT planning more challenging when selling shares. 

How to buy a property through a limited company

Generally,  you will follow these steps when buying property through a limited company: 

1. Set up a limited company

The first step in buying a property through a limited company is establishing the company itself.

This involves registering the company with Companies House, which requires you to provide details such as the company name, registered address, and information about directors and shareholders.

At a minimum, you'll need at least one director to set up the company. 

2. Open a business bank account

After setting up your company, it's crucial to open a business bank account.

This ensures all financial transactions related to the property are kept separate from your personal finances, which simplifies accounting and helps maintain clear financial records.

3. Arrange company-specific financing

Securing financing for a limited company differs from personal mortgages. Lenders offer specific mortgage products for companies, often with higher interest rates. Typically, lenders also require a larger deposit. 

For example, Barclays offers loan-to-value ratios of up to 70% for repayment mortgages and up to 65% for interest-only mortgages.

They will likely request detailed financial information about you and the company, including business plans and financial forecasts, to assess the ability to meet mortgage repayments. Keep in mind your personal guarantee may also be asked for.

4. Purchase the property in the company’s name

With financing in place, you can purchase the property under the company's name. This involves completing the necessary legal documentation to transfer ownership to the company and registering the property accordingly. 

It's advisable to work with a solicitor experienced in property transactions to ensure all legal aspects are handled correctly.

5. Maintain proper accounting and reporting

Once the property is acquired, maintaining accurate financial records is essential. This includes tracking all income and expenses related to the property and ensuring compliance with statutory requirements. 

Your company must file annual accounts with Companies House and submit corporation tax returns to HMRC. 

Get expert financial advice

Buying property through a limited company offers attractive tax benefits, asset separation, and added flexibility for building a property portfolio.

However, the structure also brings additional costs, demanding mortgage requirements and compliance responsibilities. These factors will help you decide if this approach aligns with your investment strategy.

Let Unbiased match you with a professional financial adviser to help you navigate the complexities of buying property through a limited company and ensure your strategy aligns with your financial goals.