7 questions to ask before incorporating to invest in property

Incorporation considerations you must discuss

If you’re considering investing in property as a limited company rather than as a personal name, you could increase your profits by doing so. And the costs of setting up as a limited company are surprisingly low. However, before you rush to incorporate to invest, you should seek advice. You’ll need to consider your own personal financial position and tax profile, as well as your investment objectives.

Here are seven questions to consider before deciding whether to invest in property as a limited company.

1.      Should you buy properties in a personal name or as a limited company?

Generally, it will probably be better to set up as a limited company to invest in property if you are (or could become) a higher rate taxpayer.

2.      Could you transfer your properties to a lower taxpaying spouse?

To avoid the worst effects of the property tax changes and how tax relief on mortgage interest payments is changing, you may be able to transfer properties into your spouse’s name. If they are a basic rate taxpayer, then their tax liability will be at the basic rate and not the higher rate. However, if the extra income puts your spouse into a higher rate tax bracket, the advantage is lost again.

3.      Do you need the income from your property?

If you don’t need income from the rental of your property, you could make a bigger profit by letting it accumulate in a limited company. You can then use these profits to purchase more properties and increase your property wealth faster (while paying lower amounts of tax).

4.      Do you invest using buy-to-let mortgages?

Buy-to-let mortgages may be a little more expensive when borrowing as a limited company. However, when investing as a limited company, your mortgage interest payments count as operating expenses. This reduces the profits on which you are taxed. Your profits are then taxed at the corporate tax rate (19% now, and reducing to 17% in 2020/21) rather than your personal tax rate (20%, 40% or 45%).

5.      What are your investment goals?

If you want to increase your wealth pot to leave to your loved ones, then investment via a limited company can be structured to reduce inheritance tax liability.

If you want to access some income, you can take dividends of £2,000 per year with no further tax liability. Above this level, your dividends will be taxed. The amount of tax charged depends upon your personal tax circumstances.

6.      Are you thinking of putting existing properties into the limited company?

While holding properties in a limited company accesses all the tax benefits, transferring existing properties into a limited company may not be worth it. Doing so involves a sale and repurchase. The sale out of your name could incur a capital gains tax liability, while the limited company must pay stamp duty on the purchase.

7.      Will the running costs be worth it?

You will need to hire an accountant to make up your accounts and file tax returns and annual returns to Companies House. As a director, you will have certain responsibilities, too. The extra paperwork and expense should be calculated before deciding whether to incorporate.

There is no ‘one-size-fits-all’ answer

One thing I can tell you now is there is no ‘one-size-fits-all’ answer to the question of whether you should incorporate. There are so many factors that must be considered, you must seek advice before making any decisions.

You should understand the tax implications of investing in a personal name and as a limited company. You must also be clear about your investment objectives.

Get ahead of the game now. The earlier you act, the more beneficial any decision you make will be. Contact Gladfish today on +44 207 923 6100 and book a strategy consultation. Together, we’ll assess your current financial position and investigate how your property investment should best be structured.

Live with passion and fun,

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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