There are several differences between investing personally and through a Limited Company. Here, we answer your top questions to help you decide which is best for your property investment journey.
You may come to a point in your property investment journey when you’re considering whether investing via a Limited Company structure may be more beneficial to you than through your own name.
You may also be a first-time landlord looking for guidance on the best route for your property portfolio plans. No matter what stage you’re at, making informed property investment decisions is essential.
Below, we cover the differences between both investment structures to help you get started.
What are the benefits of investing in my own name?
There’s no one-size-fits-all approach to your property investment plans, and your individual circumstances determine whether it’s best to invest personally or through a Limited Company. That being said, there are a few reasons why you may still opt to invest in your own name:
Tax position
As an individual, your rental income is taxed at your highest marginal rate; if this income doesn’t increase your tax bracket, it may be more suitable to invest personally. Please seek professional tax advice before making any property investment decisions.
Mortgage costs
Mortgage rate pricing for Limited Company products is becoming increasingly competitive. However, rates for individual borrowers are typically still slightly lower, especially on vanilla properties.
Less paperwork
Investing via a Limited Company means registering your Company on Companies House and filing all the correct annual paperwork. While there’s still admin to do when you invest in your own name, there is slightly less than when you own and run a Limited Company.
What are the benefits of investing in an SPV Limited Company?
One of the main reasons landlords use SPVs for buy to let property is the tax treatment of profits. Instead of paying Income Tax as an individual, the SPV pay 19% Corporation Tax on the profits. Therefore, the tax benefits of owning property through an SPV can be significant, especially if you are a higher-rate taxpayer (40%) or an additional-rate taxpayer (45%).
As mentioned earlier, if you own and rent a property personally, you will be taxed on all income earned from the rental, regardless of its distribution. If you use an SPV, you can choose how to distribute the profits and take advantage of tax-free dividend allowances (£500 per individual). In some years, you may decide to draw a larger dividend and a lower income or vice versa, depending on the circumstances. Or, you can choose to leave the profits in the company to be re-invested in more properties.
Everyone’s circumstances are unique, so please take professional tax advice before making any property investment decisions.
Furthermore, it’s worth noting that the Prudential Regulation Authority regulates buy to let mortgages for Limited Companies differently from those for individuals. This means you can typically borrow more against a property through a Limited Company than in your own name.
What are the tax benefits of investing via a Limited Company?
As of April 2020, mortgage interest is no longer an allowable expense, and landlords cannot deduct mortgage expenses from rental income to reduce their tax liability. Instead, you will receive a tax credit based on 20% of your mortgage interest payments. This effectively means up to 40% of the interest amount will no longer be tax-deductible for higher-rate taxpayers.
However, this change does not apply to landlords who hold property in SPVs, which means Limited Company landlords can significantly reduce their tax bill. In addition to the mortgage interest, you can also claim tax relief on service charges and repairs.
Consequently, many landlords have found that borrowing through an SPV Limited Company is much more tax-efficient.
Please seek professional tax advice before you make any property investment decisions.
I’m a first-time buy to let landlord, should I invest personally or via a Limited Company?
The most important thing for you to do at this stage is seek advice from a tax professional or accountant specialising in property investment. Your existing income and property investment plans will impact whether you should invest personally or via a Limited Company, so have these discussions before getting started.
If you are considering using an SPV as the ownership vehicle for your property, it is advisable to set up the SPV before buying property. If you “transfer”* existing property into the SPV, you will incur additional costs for Stamp Duty Land Tax, legal fees, higher-rate tax brackets, and potentially Capital Gains Tax. (*This transaction is treated as a sale, where you will have to sell the property to the SPV at market value.)
Keep in mind that most lenders will seek a Personal Guarantee from the Directors (and sometimes the main shareholders) of your Limited Company. This means that should the Limited Company be unable to make mortgage repayments, you (and any other Directors) will be liable for any arrears.
Once you’ve spoken to a tax professional, our brokers will be more than happy to chat through the types of mortgage rates you can access.
Is it cheaper to borrow in my own name than through a Limited Company?
This will depend on the lender and your individual circumstances. As Limited Company borrowing has become more popular, new ‘vanilla’ and specialist lenders have entered the Limited Company market, making pricing more competitive. Some specialist lenders offer the same rates for individuals, SPVs and Trading Limited Companies. However, on the whole, Limited Company rates are marginally higher on a like-for-like basis.
Is it easier/quicker to invest personally or via a Limited Company?
Not necessarily. Given the rise in popularity of Limited Company borrowing, applications made in your own name and through a Limited Company will generally take a similar amount of time to progress.
Lenders conduct background checks on Limited Company directors (and sometimes shareholders) during the mortgage application process. These checks are almost identical to the due diligence performed when you apply in your own name; there is little difference.
It’s worth noting that Limited Companies with existing portfolios may take longer to process, as lenders will complete more background checks on the Company, including its accounts, properties held and directors.
What next?
To discuss your property investment plans, contact one of our expert brokers. We can review your options to help you get started and find the best mortgage rate for your needs. Call us on 0345 345 6488 or submit an enquiry here.
