Purchasing property through a limited corporation: Pros and Cons

According to a recent survey by Paragon Bank, the number of landlords wanting to form limited companies to buy buy-to-let properties jumped by 50% between the first and second quarters of 2022.

According to a recent survey by Paragon Bank, the number of landlords wanting to form limited companies to buy buy-to-let properties jumped by 50% between the first and second quarters of 2022.

The percentage of landlords who stated they were considering employing limited corporations at the time was at its highest level in the previous three years.

Since 2017, when the government made modifications to the laws governing how mortgage interest was taxed, this trend has become more pronounced.

Benefits Include:

1.      Reduced mortgage taxes

Due to the upcoming tax changes in April 2020, landlords will no longer be able to deduct mortgage costs from their rental revenue (to reduce their tax bill). Buy-to-let mortgages are expensive, and paying taxes and interest on a monthly basis may rapidly eat into rental income, as every landlord would agree.

2.      Replenish savings

Your gains after corporation tax, if you purchased your property through a limited company, can be reinvested in more buy-to-let properties through the firm. It assists you in avoiding further tax payments.

3.      Tax reduction

The main justification for investors to form limited corporations is probably the thousands of pounds they can save. Individual landlords who get rental income are subject to income tax, just as those who receive salaries, dividends, or stock gains.

The tax rate varies based on income and is between 20 and 45%. By purchasing real estate through a limited company, you are subject to corporation tax rather than income tax, which is much higher at 19%.

4.      Benefit of inheritance taxes

Purchasing the properties through a limited company may be a wise move if your ultimate goal is to pass your real estate investments down to family members because you would have more options to lower inheritance tax.

Drawbacks include:

1.      When you withdraw money, pay tax

It's not always simple to withdraw money from the company. Either you either receive the money as a wage or you must withdraw it as a dividend. You can't just take the cash out and put it in your pocket. As a result, even though there are opportunities for savings in some areas, you will also incur expenses in others.

2.      Mortgage accessibility

Although there are fewer mortgages available than if you were an individual investor, the same checks still apply. Finding the ideal mortgage used to be much difficult for businesses, and they tended to have smaller borrowing limits and much higher monthly rates.

3.      It costs a lot to transfer real estate in your own name

You cannot just transfer your existing buy-to-let investments into a corporation if you already have a number of them. Your business will have to purchase them from you! This means you'll have to pay the typical expenses associated with buying and selling real estate, including stamp duty tax, capital gains tax, any fees associated with paying off your mortgage early, and legal fees.

Transferring your properties into a company name might not be worthwhile if you simply own one or two homes. It might, however, be a more tax-effective option if you own 10 rental units. You should always seek counsel from a professional before making a choice.