Investing Through a Limited Company

LTD or Personal:

What’s the Difference?

Whether you’re a seasoned investor or just getting started, understanding the differences between buying an investment personally or through a limited company is crucial. Purchasing property in a personal name means the individual is liable for any debts or legal issues, and they will be subject to personal income tax and capital gains tax on any profits. On the other hand, buying through a limited company creates a distinct legal entity, limiting personal liability, but it comes with added administrative responsibilities and corporation tax on profits. Each way has different tax implications and financial consequences, so it’s essential to carefully weigh up the pros and cons before making an informed decision. 

Tax Advantages

Investing through a limited company can offer significant tax advantages, especially when it comes to reducing overall tax liability. Instead of paying income tax on rental profits at a personal tax rate, which can be as high as 40% or 45% for higher-rate taxpayers, investors would pay corporation tax. Corporation tax is usually a much lower rate, currently set at 19%, though it may change. Due to this lower rate, it allows investors to retain a larger portion of profits.

This difference in tax rates can lead to large savings, especially if the profits are reinvested into expanding a property portfolio. Over time, the tax savings from holding property in a limited company can compound, helping to grow investments faster than if they were subject to personal tax rates. Additionally, by keeping profits within the company, investors can further reduce their tax exposure and avoid the higher taxes triggered by drawing the income as salary or dividends.

Investing through a limited company can also offer some shielding from other taxes. In many cases, it can reduce the risk of triggering stamp duty land tax (SDLT) on inheritance or the need to pay capital gains tax (CGT) upon the sale of the property or shares. The specific tax treatment will depend on the circumstances, but the potential to reduce CGT and avoid SDLT when transferring shares is an attractive feature for those looking to safeguard their investments for future generations.

Inheritance Planning

Property investing through a limited company can offer more flexibility and potential advantages when it comes to inheritance tax (IHT) planning. Making it easier to pass a property portfolio onto future generations. One of the key benefits is that the shares in the company, rather than the property itself, become the asset that is transferred upon your death. This can provide significant IHT planning opportunities, as transferring shares may not trigger the same inheritance tax liabilities that a direct property transfer would. 

Additionally, the ownership structure through a limited company may allow for more control over how assets are distributed and how IHT is managed. For example, you can allocate shares in the company to family members, either during your lifetime or upon your passing. Potentially reducing the IHT bill through strategic gifting or tax reliefs like Business Relief (which could apply to shares in qualifying property companies).

Higher
Mortgage Rates

Securing a buy-to-let mortgage through a limited company can be more expensive and complex compared to obtaining one as an individual landlord. Lenders typically see limited companies as higher-risk borrowers due to the additional legal and administrative processes involved in setting up and managing the company structure. 

As a result, there are fewer lenders willing to provide mortgages to limited companies, and those that do often require larger deposits and charge higher interest rates. In addition to these upfront costs, the application process can involve more paperwork, including detailed financial statements and company records.

Double Taxation

If an investor wants to take profits out of a limited company, they can do so by paying themselves dividends. Dividends are generally more tax-efficient than taking a salary because they are subject to lower rates of tax and do not incur National Insurance contributions (NICs), which would apply to salary payments. This makes them a popular option for company directors and shareholders looking to extract profits from the business in a tax-efficient manner.

However, it’s important to be aware of the issue of double taxation when taking dividends. This occurs because the company first pays corporation tax on its profits, and then shareholders are taxed on the dividend income they receive from those profits. Meaning, the money is taxed twice, once at the corporate rate and then again at the individual rate.

The good news is that there is a tax-free dividend allowance of £500, meaning an investor will not pay tax on the first £500 of dividend income they receive in a tax year. Any dividends above this threshold will be taxed at the applicable dividend tax rates, which depend on their total income and your income tax band.