“Should I buy my next property through a limited company?” is the question I get asked more than almost any other. The honest answer is: it depends, but here is what it actually depends on.
Let us take a property generating £20,000 net rental profit a year, owned by a higher rate taxpayer.
Personally owned: after Section 24 restrictions on mortgage interest relief, you could easily be paying 40% income tax on a large portion of that profit. Say £7,000 to £8,000 in tax per year.
Through a limited company: the company pays corporation tax at 19% on profits up to £50,000 (the small profits rate). That is £3,800. If you then extract that profit as a dividend, you pay dividend tax on top at 8.75% for basic rate, 33.75% for higher rate. So the comparison is not as clean as the corporation tax headline suggests. (Dividend Income Tax rates are changing – find the latest rates here: Changes to tax rates for property, savings & dividend income – GOV.UK)
The stamp duty picture is also important. If you already own the property personally and want to transfer it into a company, that is treated as a sale at market value. You pay capital gains tax personally on any gain, and the company pays stamp duty at the higher additional dwellings rates (currently adding 5% surcharge on top of standard SDLT bands).
Buying new property through a company from the outset avoids the personal-to-company transfer problem, but the company still pays the 5% additional dwellings surcharge.
Mortgage availability and rates are generally less favourable for limited companies, and arrangement fees tend to be higher. Further, often inheritance tax implications should also be considered before choosing the right structure.
A company structure usually wins clearly when it is a larger portfolio or a higher rate taxpayer reinvesting profits rather than extracting them, and the focus is onlong-term wealth-building rather than income now.
What structure are you currently using, and are you happy with it?