Owning property via a limited company

Property May 30, 2011

When you purchase properties in the UK, you might be tempted to setup a company to do the purchasing. As with any business incorporating has several benefits, like reduced taxation and increased flexibility. Property investing however has some specificities that need to be kept in mind before you decide to make the jump. Here are some of the benefits and drawbacks of incorporating when doing property investments:

Benefits of owning property via a company

1. Flexibility regarding share transfers
2. Reduced stamp duty (0.5% vs. up to 5%)
3. Lower tax rates on net rents
4. Indexation allowance on capital gains
5. Profits can be reinvested
6. Income may be extracted by dividends
7. A company has limited liability

Drawbacks of a non-direct ownership

1. No annual CGT exemption nor PPR relief for companies
2. No enterpreneur's relief available
3. Cost of administration and accounts filing
4. Potential double CGT charge upon dissolution of company
5. Potentially more difficult to obtain mortgage financing

As with everything, each situation merits specific consideration. While incorporation does not always bring the benefits one would hope because of the specificities of property taxation rules, there are still cases where it makes sense, and it should not be written off too hastily.

UPDATE 1: Since April 2013, a new tax called ATED (annual tax on enveloped dwellings) has been introduced for residential properties owned through a limited company. Initially it only affected properties whose value is above £2m but HMRC has now announced that the threshold is going to be reduced progressively to include all properties valued at £500k and above. While there are exemptions, this is complex taxation and one should take care to understand all the implications before going the limited company route.

UPDATE 2: In the Summer budget 2015, it was announced that interest relief for BTL investments would be progressively phased out for high rate tax payers (and limited to the basic rate band). It was also announced that the wear & tear allowance, widely taken advantage of by owners of high value properties, would now disappear. Under those circumstances, investing through a limited company becomes a lot more attractive.