Do I need a Limited Company to invest in property?
Of course, this question really depends on what you’re doing at the moment, whether you’re a business owner, self-employed, whether you’re working for anybody, and also depending on what your circumstances are. Also if you’ve already got property, you’re already investing or whether you’re new to investing.
There are so many factors to consider.
You should always go and speak to a qualified accountant and tax advisor to get the best advice for you and your business.
That said though, there are reasons why people talk about investing in companies and that is because a few years ago the government decided that they were going to remove a relief that was available to property investors for use against their interest free mortgage payments.
Part of the way it worked was if you bought a property in your own personal name and you had an interest only mortgage, all of the mortgage interest payments could be offset against your income from that property.
So for example, if I had a property and my mortgage interest only was £300 a month and the property was generating me £600 a month from rent. I could take away £300 from that £600 and any other costs and then I would only be taxed on that what’s left?
So let’s say I had a £300 mortgage. I had £50 costs and I’ve got £600 pounds coming in from the rental.
That means £600 minus the £300 and minus another £50 in costs.
I’m then making £250 a month cash on the property which I would then get taxed on.
I wouldn’t get taxed on the whole £600 .
Well the government changed that a few years ago and if you’re holding it as a sole trader or
personal name, or just as you not as a company, that tax relief was taken away.
So now you’re going to get taxed on that full £600 that you get before they start taking away any of the costs like mortgages.
This made investors seek out other ways to reduce the tax liability. One of the ways they found was to set up a company and buy in the company. This is because a company structure is taxed differently and the company tax is similar to what it used to be.
So in a company when you buy something all your costs of that purchase are taken away before they calculate the profits.
So it’s a similar scenario, only this time we’re talking about company or corporation tax rather
than personal tax.
So if I bought a property in a company name, lets say I create Neil Stewart Limited and I go and buy a three bedroom property and I then rent that property out for £600 a month.
I’ve got a mortgage of £300 a month. I’ve got some costs of £50 a month. I only pay tax on that £250 a month profit.
That’s one of the reasons why a lot of people have gone down buying with limited companies. That’s not the only reason, there are other reasons.
If it’s your first property you may not want to buy in a limited company. Buying a first property in your personal name, there can be tax relief that you can use with your first property.
Once you get to this second property, you then start to lose a lot of the benefits of buying it in your own name, so you then may want to go into limited company. Again, these are just ideas and reasons why people might have done it.
I am not a tax adviser. I can’t give you tax advice. You have to speak to a qualified tax accountant to get this information, but hopefully that’s useful