Should I set up a limited company for investing in property?

3 elements property investors must determine before taking the limited company plunge

A short while ago on my investment blog I asked the simple question, “Is a limited company structure right for your property investment?” Since then, I’ve had a few clients ask if there is a list of criteria that can be used to  self-check if investing property through a limited company is the best route to take. I’ve come up with six questions that a property investor should ask himself or herself before investing in property via a limited company structure.

I look at the first three questions a “soon to be” investor should ask themselves before setting up a limited company to invest in property, then I'll highlight the rest in my next 2 posts.

Am I a higher rate taxpayer?

If you pay tax at a higher rate, then the income made when investing in property is taxed at your highest rate (which could be 45% at present). Between now and 2020, the amount of tax relief that can be claimed by individuals investing in property will reduce to 20% from 45%. But this doesn’t affect those investing via a limited company.

So, if you are a higher rate taxpayer, setting up a limited company to invest in property is likely to provide some very attractive tax advantages.

Will I want to sell my buy-to-let properties to fund my future lifestyle?

It might be that you have a bucket list of things you want to do in the future, or in retirement. And, if you haven’t got access to funds to do these things, then selling your buy-to-let properties might be something you will need to consider. Perhaps this is part of your investment strategy.

As an individual investor, you’ll have to pay capital gains tax (CGT) at either 18% or 28%. Within a limited company, property disposals are counted as a normal part of the business and would be taxed accordingly (currently 20%). So you could save on CGT by paying corporation tax.

However, as an individual, you have a CGT allowance of more than £11,000, on which you don’t pay any CGT. There are also other reliefs that you might be able to apply, and some strategies that you can use to reduce your CGT liability further when calculating your capital gains tax liability on your property investment.

There are pros and cons for how CGT is treated for both individuals and as a limited company investing in property. You really need your calculator and the advice of a professional tax expert to consider the impact on you fully. In general, though, the fewer properties you own, the easier it is to stagger sales across tax years and maximise CGT allowances.

Am I likely to buy and sell properties regularly?

Linked to the question above, if you plan to buy and sell properties regularly (and assuming you do so for profit), every sale will rack up against your CGT liability as an individual. That CGT allowance gets eaten into very quickly and you could find yourself paying 28% tax, whereas within the limited company structure your tax would be calculated differently.

If profits are retained within the limited company structure and used to reinvest, your gains will only be taxed at 20%. On top of this, you may be able to defer any tax payable by using business asset rollover relief – using this effectively means you will have more to invest until such a time that you sell the new property purchased.

Generally, if you are an active investor buying and selling property regularly, setting up a limited company for investing in property will help you grow your portfolio more quickly, retain more of the profits, and pay less tax.

Next time, I’ll take a look at the remaining three critical questions you need to answer about current and future income and inheritance before you can decide if setting up a limited company is the right option for you to take.

If you have further questions, do not hesitate to call our team on +44 (0)207 923 6100.

So, have you thought about setting up a limited company for investing in property? Do you know someone who has? What's the experience been like? Has it been worthwhile? Leave your comments below.

Live with Passion,

Brett Alegre-Wood

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