Buying property through a limited company: the pros and cons

Last updated: 20 October 2022

Up to 80% of investors now buy though a company. But is it right for you?

The biggest trend that's taken place during my time in property is the huge and sudden shift to people buying properties through limited companies.

Up until 2015, it was very much a minority choice: there was no compelling need for many people, and mortgages for companies were much less competitive.

But then the changes to the treatment of mortgage interested introduced in the summer 2015 budget happened – which made the company route far more appealing. According to brokers, up to 80% of new mortgage applications are now for limited companies.

It still won't be for everyone, but it's now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let's take a look at the pros and cons…

Before we do though, a quick disclaimer: this is not tax advice. I'm just sharing general information, not making any kind of recommendation If you want tax advice, you should pay an expert for it.

Are you a trader or an investor?

The first important distinction to draw when making this decision is whether you’re a property trader or investor.

If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying property through a limited company.

Why? Because when trading properties as a limited company you will pay corporation tax on your profits – you can find the current rate here. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be a whole lot more (current rates here).

(As an individual you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it, but let’s park that one for now.)

If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

Why might property investors want to use a limited company?

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. Tax treatment of profits

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company (which we'll come to later), but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.

2. Tax treatment of mortgage interest

Mortgage interest is no longer an allowable expense for individual property investors (they can just claim a basic rate allowance instead) – but it is still allowable for companies that hold property.

(The change was phased in between 2017 and 2020, and you can read all the details here.)

The post I've linked to goes into how it all works, but the upshot is that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

3. Opportunities to mitigate inheritance tax

Property held within a company gives more options when it comes to planning for Inheritance Tax. It's all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because of course, there are downsides too…

Why not invest in property through a limited company?

1. Mortgage rates

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

Now, that's changed. While there aren't quite as many options for limited companies as there are for individuals, there are plenty to choose from. And as a result of there being more competition in the market, rates have come down.

However, limited company mortgages are still more expensive than those for individuals: the interest rate is typically around 1% higher, and fees are typically higher too. You'll need to factor this in when assessing your options, and balance the higher mortgage costs against the lower tax.

Bear in mind that when taking out a limited company mortgage you'll still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”.

2. Dividend taxation when you take the money out

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.

But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a hefty whack in dividend tax on what's left (current rates here) in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. Extra cost and hassle

Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

How to decide if using a limited company to buy property is right for you

Which side of the fence you come down on when it comes to buying property through a limited company is going to largely depend on three factors:

How much income do you have?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

Do you want the property income to live off?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

Do you use mortgages?

The ability to claim the entirety of your mortgage interest as operating expenses will be a major argument for using a company for higher-rate taxpayers.

Who are you buying properties for?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

So the answer is, of course…”it depends”

The shift towards investors buying properties through limited companies is relatively recent, but it's happened to such an extent that many people now assume that the limited company route is definitely better.

That's not the case: as we've seen, there are pros and cons, and it can be very expensive to make assumptions.

As a very general rule of thumb, someone investing for the long-term and allowing rental profits to roll up towards future purchases is often better off using a company – and as this describes the majority of investors, that's why so many mortgage applications are now for limited companies.

But tax is complex, and so are personal situations. It's dangerous (and expensive) to assume – especially because it's very, very difficult to change a property from one type of ownership to another once you've already bought it.

If there's one thin we've learnt, it's that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.

Before doing so, you should absolutely speak to your accountant: rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.