Investing in property: personal name vs a limited company

Forth Action Invest on August 16, 2021

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If you are thinking about investing in property, then you may have heard that it’s best to set up a limited company to purchase your property, rather than act as a private individual. This may not automatically be the case, however.

Why a limited company?

The biggest advantage of setting up a limited company are the tax savings you can potentially make. Unlike private landlords who only get a tax credit worth 20% of their mortgage interest, a limited company can treat mortgage interest as a cost and therefore offset the whole amount against profit.

Corporation tax is currently levied at 19%, rising to 25% by 2023. Even though you are additionally taxed on the income you take from your company, by using a mix of dividends and salary, this tax liability can be reduced. If you are a higher-rate taxpayer, then using a limited company is going to result in substantial tax savings. You can also maintain your rights to benefits, including the state pension, by paying yourself a salary.

Finally, there is no personal liability should your limited company get into financial difficulties. It’s worth asking yourself how much that peace of mind means to you.

Why not a limited company?

If you are a basic-rate taxpayer, then there is a chance you may actually be better off trading as an individual. Depending on your other sources of income, by paying corporation tax and then dividend and/or income tax you could ultimately end up with a larger tax bill. There are careful calculations to be made and the advice of an accountant is highly recommended.

As any company director will tell you, there’s a small mountain of paperwork to deal with in order to comply with the company law. Although most people will use an accountant to deal with this on their behalf, you do still need to keep your accounts in good order, pass on all the relevant data when required, and, of course, pay your accountant!

A final consideration is that there is a smaller choice of mortgages available for companies and these generally have higher interest rates.

Final thought

The implications of using a limited company for property investment can vary dramatically from one person to another.

It’s vital to make the decision based on your personal financial circumstances.