Whether you’re new to property investment or have had a portfolio for a while you have probably wondered whether you are better off holding your properties in a company or privately.
Well, the truthful answer is that it all depends!
Everyone’s situation is different and what suits one investor may not suit another.
In this post, we’ll be looking at some of the benefits and the downsides of holding your property in a company.
The benefits of holding properties in a company
Mortgage interest
From 2017 the tax treatment of mortgage interest changed and it has become a lot less advantageous for individuals.
However, for companies, there are no finance charge restrictions, in which case all the costs of a mortgage will be tax-deductible.
Administration expenses
Individuals are entitled to charge the costs of holding property against their tax bill however this needs to be wholly and necessarily incurred in the letting of a property.
But if you have a portfolio it may be difficult to charge the overall costs of administering the properties.
With a company all of the admin expenses, even if you can’t allocate them to individual properties are tax-deductible.
Taxation
If you are not intending to use all of the money and will be reinvesting then it may be useful to buy through a company.
The corporation tax rate at the time of writing is 19% and will drop to 17% in 2020. This means that for higher rate taxpayers that don’t wish to use the income personally it may be worth leaving the cash in a company and then using it later to buy more property.
If you are buying property to refurbish and sell on then you will probably be best to buy as a company as the property is classes as your stock in trade.
This means that tax is paid on the profits at 19% (or 17% from 2020 onwards) rather than the capital gains rate of 28% for residential property that is not the main home.
Inheritance tax planning
Holding properties in trust give advisors more options when planning your estate.
This is especially the case if you intend to pass the properties on to further generations.
This is a complex area and one change made can affect other areas so you absolutely must get advice here from a professional but there are advantages to be had here.
The disadvantages of holding properties in a company
Administration
It has to be said that when you are holding property as a business there is a fair amount of administration that needs to be done.
The company itself will need to produce annual statutory accounts and file these with both HMRC and Companies House.
The business will also need to complete an annual confirmation statement with Companies House.
For properties over £500,000, the company will also be required to complete an Annual Tax on Enveloped Dwellings (ATED) return.
This is a return that identifies the dwelling but also requires the company to pay a tax based on the value. You can find out more about ATED here
Finance costs
Businesses tend to pay more for their loans and mortgages than individuals. You’ll need to be careful about working your figures using a personal borrowing rate when this may not be available to you as a company.
Increased costs
Landlords often find that when they hold their properties in a limited company their costs generally increase.
Accountant and lawyers charge more and they find their insurance premiums go up too.
Not a huge amount but all of these things add up.
Is it worth it?
Well the answer as we said before is – it depends.
There’s a general rule of thumb that landlords with more than 4 properties will probably be better off as a limited company but there is an absolute rule – you must get individual professional advice before you do anything that you might regret.
You can find out more about taxation on residential properties here.
