Contractors’ Questions: Can I buy property via my limited company?

Contractor’s Question: Should I buy a property through my limited company, as I hear that in certain circumstances it can be cheaper from a tax standpoint than purchasing it using my personal name?

Expert’s Answer: Whether or not to invest in a property through your limited company needs carefully consideration. Certainly you can do this, but whether it is tax efficient is an important question to ask before you do anything, particularly if you are tipping the higher earning bracket. 

You definitely should NOT buy your main home through your company. If you did, you could incur a benefit in kind unless you paid the commercial rent to your company. Secondly, any gain on selling the property would be subject to corporation tax, whereas if it’s a property owned personally, equity from the sale of your home is usually entirely tax exempt.

So let’s assume that the property you are intending to buy through your limited company is for rental income. The following table explains the likely tax position:

  

Rental income

Capital gains tax

Other comments

VAT

Buying property for rental income through the company name

Rent received from the property will be subject to corporation tax at 20%

Any sale will be subject to CGT 18% (basic rate) or 28% (higher rate) 

If the company got into difficulty legally or financially, the property would be at risk. Additional legal costs and taxes would be due to transfer the property back to you. 

If registered under the flat rate VAT scheme, rental income will constitute turnover for VAT purposes of which you’ll give HMRC a proportion each quarter

 

Rental profits taken as salary or dividends will be taxable income taken from your band.

Companies can deduct an allowance for the effects of inflation on the cost of the property (‘indexation allowance’). 

A director’s personal guarantee may be required which takes you out of limited liability protection of your own personal assets.

 

 

Dividends do not attract NIC, and the maximum tax on dividends for a higher rate taxpayer is 32.5%.

 

If you apply for commercial finance to buy residential property the mortgage rate may not be as favourable.

 

Buying property for rental income through your personal name

Income tax payable at 20% or 40% depending on your tax bracket 

Individuals may deduct the annual CGT exemption 

You will be obliged to fill in a SA tax return

 

 

Income will use up some of your tax band and leave less for basic rate dividends from your company

Individuals can claim indexation allowance only for periods of ownership up to April 1998. 

 

 

 Summary

Owning residential property either through the company or personally has disadvantages and advantages. For example, basic rate taxpayers should strictly avoid buying property through a limited company while higher rate tax payers, who are not looking to take salary or dividends from the company, can reduce their tax liability from 40% personal tax to 20% corporation tax.

Conclusion

Each individual case is different and depends very much on the long-term goals of the individual or the company. That is why this critical long-term tax-planning decision should always be discussed with a reputable and competent adviser, so all the implications and other choices open to you can be professionally examined before you take any action.

The expert was Sumit Agarwal, managing director of contractor accountancy firm DNS Associates.

 

 

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Written by Laura Wilkinson

Laura is the Digital Marketing Manager for ContractorUK. She has worked at ContractorUK for 6 years and is qualified with a Professional Diploma in Digital Marketing via The IDM.
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