Setting Up a Property Investment Company: Key Considerations for Landlords
Many landlords today are considering setting up a property company through which to own their buy-to-lets. Here we will look at the key considerations for landlords when setting up a property company.
What is a Property Company?
A property company is a company set up specifically to own property, such as a buy to let or a property development. A property company is a way of owning property indirectly. Instead of owning a property directly a property investor owns the company and the company owns the property.
A property company is a legal entity in its own right quite separate from the owner of the company.
Setting up a property company is also known as incorporating.
Why Set Up a Property Company?
The main reasons that landlords set up property companies are that it may be more financially attractive and more tax efficient. A property company may make more money and pay less tax than owning a property directly.
Other possible benefits of setting up a property company include that it limits a landlord’s personal liability and also offers more flexibility when buying and selling property.
Key Considerations for Landlords
Setting up a property company may have both advantages and disadvantages. Here are some of the key things landlords should consider:
Income Tax and Corporation Tax Advantages
Individuals pay Income Tax and National Insurance Contributions on their income while companies pay Corporation Tax on their profits. Under the current tax regime it is likely to be more tax efficient for property to be owned by a company than an individual. This can particularly be an advantage for higher rate taxpayers.
Note that the main rate of Corporation Tax is due to be increased in 2023.
Owners of property companies may withdraw money from their company via dividends, director’s loans and pension contributions as well as salaries. This offers an opportunity to take remuneration from a company in the most tax efficient way.
Capital Gains Tax Advantages
Based on current Capital Gains Tax (CGT) and Corporation Tax rules and rates property companies are likely to pay less tax or even no tax when selling a property compared to an individual.
Note that companies do not have an annual CGT allowance like individuals.
Ability to Offset Mortgage Interest Costs Against Income
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 they pay on buy to let mortgages as an expense against income.
Cash Flow Advantages
Property companies may retain their profits within the company and reinvest them to grow their business. This can have positive cash flow advantages.
Restricted Mortgage Availability
Not all lenders offer mortgages to limited companies. There is a more limited range of mortgage products and LTVs may be lower.
Lenders who will lend may have a limit on the total number of properties or total value of properties in a property company portfolio. Some lenders have a minimum property value they will lend on.
Higher Mortgage Costs
The interest rate and arrangement fees charged for mortgages taken by limited companies may be higher than for homeowner mortgages.
Requirement for Personal Guarantees
Directors of limited companies may have to provide personal guarantees when taking out mortgages.
Lenders lending to a property company generally look at the financial standing and ability to repay of the company directors rather than the company itself. (An advantage however is that this can make it possible to finance projects which could not otherwise be financed.)
Stamp Duty Costs
Companies have to pay a 3% Stamp Duty surcharge when purchasing property. (As do all purchasers purchasing additional properties.)
Companies may also have to pay a 15% higher rate of Stamp Duty and an Annual Tax on Enveloped Dwellings (ATED) for property valued at more than £500,000. (Although there are exemptions for property that is let or being developed.)
Additional Conveyancing Costs
Conveyancing costs are likely to be higher for a property company. This is because the solicitor/conveyancer must check the articles of association, directorships, shareholdings and other particulars in addition to the actual conveyancing work.
Estate Planning and Inheritance Tax Benefits
There are a number of strategies which owners of property companies may be able to use more effectively through a company. For example, it may be possible to transfer ownership of some of your property by gifting it to your family and thereby save on future Inheritance Tax.
A property company can be used in tandem with investing in a pension. A Small Self Administered Scheme (SSAS) can invest in commercial property or residential developments. Income on these investments is tax free until it is withdrawn.
Flexibility when Buying and Selling
Owning property via a company makes it possible to dispose of or transfer the property, or part of it, by selling or transferring the company rather than the property itself.
This can be quicker than selling the property directly and may avoid the buyer having to pay Stamp Duty.
The Opportunity to Collaborate
A company makes it possible and easier to bring other investors or partners into a property project.
The Benefits of Limited Liability
The shareholders in a property company benefit from the same limited liability as those in any other limited company. They have limited personal liability for any debts the company might accrue.
The Opportunity to Spread and Reduce Risk
With a property company it is possible to spread and reduce investment risk, such as by owning each property in a separate property company. If one property project should fail for some reason other projects or other businesses will not be affected.
Higher Set Up and Running Costs
Setting up and running a limited property company involves one-off and annual fees and expenses. These are likely to be higher than a sole trader business.
Record Keeping Obligations
Operating through a limited company involves more record keeping obligations and administrative work than a sole trader business. Company directors have specific legal responsibilities and duties and may be fined or banned if they do not carry them out correctly.
Limited companies are required to publish information about their activities, their finances and their ownership and this information is publicly available to anyone. Individuals are able to keep most of this information confidential.
Impact on Personal Tax Situation
Being a shareholder in a property company may affect the shareholder’s personal tax situation.
Exposure to Future Changes in Legislation
A company will be exposed to future changes in legislation and taxation affecting property companies. If laws and taxation related to limited companies are changed in the future, perhaps to be less favourable, this will affect your properties. It may not be easy or cheap to remove them from company ownership to direct ownership.
These considerations are just some of the main considerations for landlords when thinking about setting up a property company. However, the impact of each may differ considerably according to each landlord’s personal situation. It is essential to take individual professional advice.
What Type of Property Company Should I Use?
Using the correct company structure will enable you to maximise the advantages of owning property through a company and minimise some of the disadvantages.
It is possible to own property through an ordinary trading limited company. This might be a company you already own, or one you set up, which is also involved in other business activities. There can be disadvantages of owning property in this type of company, however. Owning property through a trading company means it is difficult to separate the property business from the company’s other trading activities. It may be difficult to obtain mortgages if a property is owned through a trading company.
For these and other reasons a limited company which is a special purpose vehicle, or SPV for short, is often considered as a way to own property. An SPV is a company that is incorporated for, as the name suggests, a closely defined special purpose. So far as the landlord is concerned an SPV is usually formed for purchasing buy to lets investments. But SPVs can be formed for other purposes too.
If you have a number of SPVs a holding company may be utilised to own and control them all.
How to Set Up a Property Company
The registration details of your company, including the Memorandum of Association and Articles of Association, should define the business of the company and specify that it is an SPV for the purposes of a property business. This is especially important when obtaining limited company mortgages.
You can form a limited liability property company yourself and register it with Companies House. Unless you are confident about doing this correctly, however, and in order to achieve the full benefits of a property company SPV, you may prefer to use a limited company formation service, such as GetGround, to do it all on your behalf.
This article is intended only as general information and is not intended to form financial advice or tax advice on the subject of setting up a property company. It is essential to take advice from a professional adviser before taking any action.