In this article, you’ll learn the PROs and CONs of using a Limited Company as a property investor in regards to the tax structure. So if you want to make an informed decision, just stay with us!
So without wasting a single moment, let’s start.
A private company or conglomerate whose possessors are responsible legally for its debts only to the extent of the amount of capital they have invested.
The greatest perk of establishing a limited company is that it is vulnerable to the risks. Let’s explain with this a simple example.
Suppose you own a property and everything doesn’t go according to the plans, your tenant can take you to the court as an individual.
Contrarily, if the same property is owned by a limited company, then the legal responsibilities or liabilities will rest with the company rather than you. In such a case, if something goes wrong, then the tenant can only take action against the company and can only take assets own by the company. The tenant will have no legal right whatsoever of either taking legal action against you or to take anything from you. So, setting up a limited company as a property investor considerably reduces vulnerability to financial risks.
PROs of Using Limited Company as Property Investor
- Taxable Profits: Limited Companies vs Individuals
Since April this year, the government has reduced corporate tax by 3 to 17.
This decrease in corporate tax is exactly 3pc less than the income tax band for a basic rate taxpayer.
Also, if you in the individual capacity possess a property, HMRC will add your profits that you’ve earned from the property in your other incomes, and therefore will charge income tax on it.
Contrarily, if the same property is own by a limited company, then the profit that you’ll make from the rents will be charged corporate taxes only. And to your surprise, the higher rate of the income tax is almost 50pc more than that of the corporate tax. See, the relief is enormous and savings are almost double.
However, HMRC will charge you tax on dividends if you’re taking profits out of the limited company. But here’s flexibility too: to maximize the relief, you can either disburse profits among those members of the family who fall under the category of the basic taxpayer or let profits stay in the Limited Company for purchasing a new property.
- Mortgage Interest Treatment: Limited Company vs Individual
Under new changes in Section-24, if you are an individual property investor, you are no longer allowed to treat mortgage interest as genuine cost or allowable expenses. However, the same will continue to be treated as an allowable expense for Limited Companies.
These changes to mortgage interest mean that you’ll pay more tax if you possess a property in individual capacity rather than in the name of a Limited Company.
CONs of Using Limited Company as Property Investor
- Dividend Taxation While Taking Out Money From Limited Company
When you leave your profits within the Limited Company, it means you’ll be charged corporate tax only whereas the income [after deduction of corporate tax] will continue to pile up.
But if you are taking profits out, it means you are paying the tax twice i-e first one is corporate tax and the second one is a tax on dividends being taken out by you.
Also, if you want to extract all the profits out of the limited company, you’ll be charged the higher rate of income tax for taking these dividends out. For your convenience, let us tell you that the higher rate of income tax is 32.5pc.
- Mortgage Availability for Limited Companies
The access to mortgage continues to be a hefty task for a Limited Company. The biggest concern regarding mortgage is that it is way too expensive for Limited Companies while it is relatively cheaper for the individuals.
- Additional Cost and Hassle
Another major drawback of establishing a Limited Company is the additional cost and administrative arrangements. Furthermore, when it comes to accounting and tax-related matters, it is way more complicated and time-consuming when compared with the individual. The unnecessary paperwork and tasks like filing of annual company account reports with tax authorities make life a little busier.
If there’s still any sort of ambiguity, consult our chartered tax advisors and accountants to make an informed decision.