The Pros and Cons of Ltd Property Companies

With changes to tax reliefs transforming the buy-to-let industry in the UK this year, many investors are now considering setting up property investment companies. But, with advantages also comes drawbacks. Here we take a brief look at the pros and cons of using a property limited company.

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Advantages of Using a Ltd Company

• Higher tax relief – From 2017 to 2020 the amount of buy-to-let tax relief individual landlords can claim back will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. However, this change does not affect limited companies.

• No tax on dividends less than £5,000 for individuals – in April 2016, the Dividend Tax Credit was replaced by a new tax-free Dividend Allowance of £5,000. This means you can potentially receive tax free dividend income from their investment properties.

• No Income Tax when reinvesting profits to secure further properties – You could grow a buy-to-let portfolio quicker within a limited company as there will be no income tax on the retained profit, thus allowing more cash to re-invest.

Although corporation tax is payable on trading profits (20% in 2015/16 – reducing to 18% by 2020), this is lower than the higher income tax rate (40% for £32,001 to £150,000 in 2016/17).

• Personal funds can be drawn back out of the company – you can draw back any advances you make to your limited company (e.g. the mortgage deposit) out of the company by way of a director’s loan.

• Debt Service Cover (DSCR) – from January this year, some lenders are now basing their debt service/income service ratio on the client’s personal tax band (i.e. higher rate and additional rate taxpayers have a higher ratio, sometimes between 160% and 185%).

However, if the property is within a buy-to-let limited company, this is not relevant and the standard ratio applies (i.e. 125%).

Disadvantages of Using a Ltd Company

• No Capital Gains Tax (CGT) allowance when the company sells a property – whereas individuals selling a property would have £11,100 CGT allowance (2016/17).

• Additional cost of running a limited company – such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable. An accountant may also charge higher fees when preparing accounts for limited companies.

• Higher mortgage rates – Most lenders charge higher interest rates and fees for limited companies compared to individual buy-to-let mortgages. However, a caveat to this is that some lenders may be aligning their limited company rates close to their standard products throughout this year.

• Reduced choice of lenders and mortgages – Many lenders do not offer mortgages to limited property companies but, if they do, the product range is often much smaller.

However, this provides an opportunity to obtain detailed knowledge of lenders products which can lead to quicker turnarounds as we know who will do what.


Read more: A Guide to Being a Landlord in 2016

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