How much does it cost to set up a limited company to invest in property?

Weigh up the costs of incorporation to assess the real tax benefits

If you’re a higher rate taxpayer, you could increase your property investment profits as a limited company.  Partly, this is because all your mortgage interest payments can be offset against your rental income for tax purposes. This has the effect of reducing your taxable profits.

In addition, your profits will be taxed as corporate profits instead of at your marginal tax rate. With corporation tax at 19% in 2018/19 and reducing to 17% in 2020/21, you’ll pay considerably less tax than investing as a higher rate taxpayer with a tax rate of 40% (or 45% as an additional rate taxpayer).

You can also use a limited company structure to reduce inheritance tax on your estate.

Overall, the tax benefits of investing in property as a limited company could be substantial for many investors. Here, I look at the costs of setting up a limited company for property investment. This should help you decide whether the strategy is right for you (though you should still take personalised advice – everyone’s situation is different).

How do you set up as a limited company?

Setting up as a limited company is much easier than many believe. It can be done online, and via an organisation specialising in company formations. You will need to:

  • Choose a company name
  • Have a real address to register the company to
  • Provide identification details of the people involved in the company (for example, mother’s maiden name and place of birth)
  • Provide proof of identity

There must also be at least one director and one shareholder. You’ll need to submit a memorandum and articles of association. These tell Companies House (the body that you register with as a limited company) about your company ­– things like who can vote, for example.

If you are using a third-party company formations organisation, they should provide you with model memorandums and articles of association.

What is the cost of setting up as a limited company?

It’s surprisingly cheap to get set up as a limited company (called incorporation) in the UK. In fact, if you are using a third-party intermediary as outlined above, you should pay no more than between £50 and £100. Providing you have all the paperwork and documentation you need, the process of incorporation can take as few as 15 minutes.

That’s cheap! What’s the catch?

This is a question we get asked a lot by investors considering incorporating before they invest. They can’t believe it’s so cheap to get all those tax benefits.

There really isn’t a catch. However, you must consider the ongoing responsibilities and costs of investing as a limited company before making the decision to incorporate.

Your responsibilities as a limited company

As a limited company, you must submit an annual return to Companies House on each anniversary of your incorporation. This is a statement of the state of affairs of your company, detailing directors and shareholders. This can be done electronically, and most limited companies have their accountant do this on their behalf.

Accountancy costs

You will also need to submit annual accounts to HMRC and pay corporation tax if any is due. If you are taking a ‘salary’ from the profits you make, you will need to show this on your Self Assessment form. Again, your accountant will be able to manage all these responsibilities for you.

It’s important not to file any of these statutory records late, otherwise, you could be charged hefty penalties (as an example, see our article “Get your tax return in or face huge penalties”).

So, your running costs include accountancy fees. These depend upon the complexity of your company, but, as a guide, for a simple company structure where the company’s finances are relatively straightforward, you should expect to pay around £750 to £1,000 per year.

Other costs of running a company

Other costs that you might incur in the running of your company will be similar to the costs of running a buy-to-let business in your personal name. All of these can be offset against rental income when calculating your taxable profit.

Should you incorporate an existing portfolio?

While all the tax benefits I’ve outlined in this article are applicable to all properties you operate in a limited company structure, for those with existing portfolios, there are some financial hurdles that may prove too high to jump.

You cannot simply transfer property that you currently own into a limited company. Technically, the company must buy it. This may mean you incur a capital gains tax liability, and the company may have to pay stamp duty on the property it purchases from you. Depending on your investment objectives, this could make transferring an existing portfolio into a limited company inadvisable.

This said, for new properties in which you invest the tax benefits of building a portfolio of properties in a limited company structure usually generates far greater financial benefits than it does cost. Many existing landlords are keeping their current portfolios in their personal name and have incorporated to acquire new properties.

To discover if incorporating will benefit you, 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.

>