You’ll most likely need to incorporate a limited company before you start building a property investment company, as this is most likely to be the best method to purchase multiple buy-to-let properties with a view to expanding your investments.
If you buy through a property investment company, you own the property investment company. The company then buys the properties, the mortgages are in the company’s name, and the company pays corporation tax on any profit from the buy-to-let properties. A property company is a separate legal entity and is separate from the owner of the company.
Incorporating a Limited Company
Company Name – An essential part of the registration process is deciding on a company name, which can prove challenging. Companies House provide a WebCheck service to search against names in use.
Registered Address – The company’s registered address can be your home address, or if you prefer to keep this private, it can be provided by your accountant. A company’s registered office details will be freely available in the public domain. They must be present on all letters, invoices and contracts, so this must be considered before finalising a registered address.
Directors – You must name at least one director when setting up a company. Directors are responsible for meeting legal requirements, keeping the annual accounts up to date, and potentially being a ‘personal guarantee’ for any monies borrowed through the limited company. This means should the company not be able to pay its debts; the directors will be personally liable to pay them.
Shareholders – You need to appoint at least one shareholder who can also be a director. A shareholder owns shares in the company, which usually means they have voting rights and influence over the company’s running. There are two main types of share structure – Ordinary shares, in which each share gives its owner one vote, or Alphabet shares, which allow a company to assign shares with different classes, for example, to pay different dividends or to give certain shareholders decision-making powers.
SIC Code – There are two potential standard industrial classification (SIC) codes when incorporating a property company. If you are buying and letting (aka, buy-to-let, portfolio investment), use the SIC code 68209. If you are buying and selling (aka, flipping or trading property), use the SIC code 68100. Selecting the correct SIC code for your business activities is important, particularly if you plan to apply for a buy-to-let mortgage.
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Record keeping when Limited Company is set up
Once the limited company is set up, you must set up a business bank account and keep a record of all income and expenditures. It’s also essential to keep a record of minutes of any board meetings, share certificates and the certificate of incorporation.
Once you start trading, you must register your company for taxes with HMRC.
We would also recommend you use accounting software to ensure your records are up-to-date and accurate when the year-end accounts need to be prepared. Please get in touch with Direct Peak for more information regarding the use of accounting software; we can help sort this out for you.
Advantages & Disadvantages of having a Limited Company
Improved tax planning – If you are a higher rate taxpayer or plan on owning multiple properties, there is a significant tax saving when having property in a limited company. When you have a property personally, rental profit is added to your other earnings (such as your job) and taxed as income tax. Rental profits on properties held in a limited company are not taxed at your personal tax rate but the current corporation tax rate (this is currently 19% rather than the 40% higher rate income tax rate). As a director, you can be flexible on what to do with the profits – invest in other properties, top up your pension pot or payout using dividends (these are more tax efficient than income tax rates).
Portfolio expansion – You can retain the profits in the company to fund future purchases – if you retain the profits in the company, the profits will not be subject to income tax. Retaining earnings within the company helps protect them from tax liabilities, so you can repay debt and expand the portfolio faster.
Inheritance planning – If you plan to pass your business on to your family in the future, property held in a limited company is much simpler to transfer than personally and could be protected from stamp duty, inheritance tax and capital gains tax liabilities.
Offset mortgage interest costs – Changes brought in under Section 24 of the Finance (No.2) Act 2015 have restricted the mortgage interest individuals can claim against tax. These restrictions do not apply to limited companies. Limited companies can still claim the interest on buy-to-let mortgages as an expense against income.
No capital gains tax allowance – If you sell a buy-to-let property personally, you will most likely be subject to capital gains tax on any gains made and get an allowance against this. By holding property in a limited company, there is no capital gains tax allowance – instead, the sale of the property would be subject to a corporation tax charge. Despite this, there is more likely to be more significant savings through paying corporation tax rather than capital gains tax.
Higher mortgage rates – Many lenders charge higher interest rates and fees to limited companies compared to individual buy-to-let mortgages, so it is worth shopping around to try and find the best deal, and different tax treatment also means that lenders’ stress testing is often more favourable for lending to limited companies over personal ownership. Many limited company mortgages will also require a higher LTV, which may mean putting down a higher initial deposit to obtain the right mortgage for your needs. Directors may also have to provide personal guarantees when taking out a limited company mortgage.
Reduced confidentiality – Limited companies are required to publish information about their finances and ownership, which is publicly available to anyone. Individuals can keep most of this information confidential.
Direct Peak Accountants is on hand to help throughout the whole process of setting up a limited company for your investment business – we can manage most of the accounts set up and ongoing operations, allowing you to focus on maximising profits and building your portfolio further. Contact us today to discuss the next steps for your investing journey.
Direct Peak provides a dedicated business tax accountant, who will prepare your annual accounts and tax returns. They will be on hand to answer any tax queries you have.
Your business tax accountant will ensure that the company is set up in the most tax-efficient way and that you are claiming for all the correct expenses to maximise your earnings.