If you have been looking to buy a property in the UK, you may want to consider buying a property through a limited company. This is a type of property purchase that has many advantages over traditional way of owning a property. It can be a very tax efficient purchase, and can also be extremely beneficial for those who are buying to let. However, there are some drawbacks to purchasing a property through a limited company, and you should be sure you understand what they are before you make a commitment.
Tax efficient
There are a number of tax advantages to owning rental property through a limited company. To start with you will get one hundred percent tax relief on interest payment on any loans on the property. If you buy the property as an individual your tax relief on your mortgate will be limited to the basic rate of tax.
Another advantage of owning a property through a limited company is that you will pay lower rates of tax. This is particularly helpful if you are a higher rate tax payer and you don’t need to draw money from the company for your living expenses.
High running costs
Buying a property through a limited company can be a good idea but it’s not for everyone. For example, some landlords may not be able to afford the costs of running a limited company or they my find it too much for the amount of rent that they are getting. The more properties you own the more time consuming it all becomes. Plus, you’ll need to hire an accountant and lawyers to keep your house in order. And don’t forget the taxman.
Buying a property through a limited company will require Limited company accounts to be filed with Companies House every year with all the filing deadlines that come with it. In addition corporation tax return will need to be filed with HMRC each year, again with filing deadline. These are not something that most people can do by themselves, hence the need to hire the services of an accountant.
Difficulty of setting up
A limited company can save you money over time but it does have some drawbacks. There are also several tax implications to consider before going the corporate route. You will need to register your company and pay some setup fees in the process.
The main reason why many property investors turn to a limited company is tax efficiency. For example, the limited company model allows the mortgage interest to be deducted before the company pays corporation tax. Also, the financial liability of a limited company is capped at the value of its assets.
If you are considering purchasing a property via a limited company, you will need to do your research and weigh the pros and cons of each option before you decide. The best way to do this is to consult a tax accountant or financial advisor.
Find mortgage lenders who finance Limited Companies
There are a lot of reasons why it’s important to find mortgage lenders who will provide finance to a Limited Company when buying a property. One of these is that when you are buying a property through a limited company, it is a good idea to take out any loan for the property in the name of the company. This will mean that both the asset and the liability are in the same vehicle. You will also be able to get one hundred percent relief for interest payment.
However, it’s important to understand that it can also hurt your credit score. For instance, some lenders may require you to provide a personal guarantee. This means you’ll have to co-sign the loan, just like you would if you were applying for a conventional mortgage.
As well as having to put more money down, you can often get a higher interest rate on a Limited Company’s mortgage.
A good first step is to talk to several different lenders. These include local savings and loans and community banks. They offer competitive rates and flexible eligibility criteria.
If you have a small Limited Company with no assets in it, you might have to provide a personal guarantee to the lender. The benefit of this is that you can usually secure a better interest rate, but it could mean you remove some of the protections of a Limited Company.
Taking out a director’s personal guarantee
When a director takes out a personal guarantee, they are agreeing to be personally liable for any debt that the company may incur. This could lead to bankruptcy if the business fails.
If the company is insolvent, the lender can go after the director’s personal assets in a bid to recover its debts. Directors should take steps to ensure that they are protected before signing a personal guarantee.
Personal guarantees are usually required by lenders when a person is seeking a business loan. The options available to the individual are based on the amount of money that is borrowed, the assets of the business and the credit rating of the owner.
Many lenders require the directors to sign a personal guarantee because this will limit the lender’s risk. However, it is important that the individual takes legal advice to understand the risks involved.
Stamp duty when buying a property through a limited company
For a limited company, there is stamp duty on the purchase of a residential property. It starts off the same as an individual buying a non-residential property. However, the company will have to pay an additional 3% surcharge on bands of the stamp duty land tax.
Can I Use My Limited Company to Buy a House to live in?
It is not always a good idea to buy a house using a limited company. The process can be difficult and there are several drawbacks. You should consider your goals and the tax implications before you make the final decision.
If you are planning to invest in property for the long term, a limited company may be the best option for you. However, if you are looking to buy a property to live in, barring exceptional circumstances, a Limited Company will not be the best idea. The main reasons are the tax implications and the difficulty of finding a lender.