Many small business owners who have managed to accumulate a reasonable amount of cash in their company’s reserves ponder this question: “Should I use this money to buy an investment property?” and “… if I do this, should I take the money out and buy a property on my name or through the company?”
Since quite a few of my existing clients-solopreneurs are in the described situation, I thought it might be helpful to write a brief article for anyone who is interested in this topic.
The quick answer to the above questions is this: if you are not considering starting a property business (when you buy multiple properties either to “flip” them or keep as investments) and just want to buy a single buy-to-let residential property as a short- or long-term investment then, in most situations, buying it privately would be more tax efficient. Below you can find a more detailed explanation for this.
The main considerations about buying a property with company reserves are about weighing the immediate and long-term tax costs and benefits of doing so. It could be that the main reason why you start thinking of buying a property through a company is that you know that the gain made on the sale of property held personally, which is not (or has not been at any time in the past) your main Principal Private Residence, would be charged to Capital Gain Tax (CGT) either at 18% or 28% (depending on your marginal income tax rate) whereas companies do not pay CGT – instead, any profit made is charged to corporation tax at 19%. However, this is not the whole story…
For demonstration purposes, let’s assume we are talking about a higher rate taxpayer here with an annual income of between £50 – 150K.
Pros and cons of buying through your company:
Pros:
- No immediate tax costs for you personally as the funds are not moved out of the business. So, you won’t have to pay tax at 32.5% on dividends you draw straight away.
- Mortgage interest charges are 100% allowed as business expenditure, unlike being fully disallowed for individual landlords from tax year 2020/21 (the maximum tax deduction allowed to individuals is equal to 20% (basic rate) of the interest paid).
- Profits can be re-invested in the company.
Cons:
- Potentially, your future profits on a property sale are taxed twice: first, you pay corporation tax at 19% on the profits, and then you still have to pay dividend tax at 32.5% to take money out of the business (assuming your basic rate band has already been “used up” by the income you receive from your main trade).
- Unlike individuals, companies have neither the benefit of the annual CGT exemption (£12,3000 – 2020/21) nor is Principle Residence Relief available to them.
- A Stump Duty payable on a property you buy through a limited company can be higher than if you bought it privately.
- HMRC can challenge the trading status of the company if there is substantial investment activity going on, compared to the main trade, which may limit the type of costs you can charge to the company. Of course, this issue can be avoided by creating a separate investment company (or SPV – Special Purpose Vehicle) and lending it the reserves from the first company. However, this involves more strategic planning and additional administrative costs.
- An investment company, unlike a trading company, will not be entitled to a generous Business Asset Disposal Relief (formerly known as Entrepreneurs Relief) if you choose to close your company down and cash out.
- Usually, it’s more difficult to secure a mortgage and the interest rates available to companies are higher than those offered to individuals.
- Most likely, a higher deposit will be required to buy a property through a company compared to a private purchase.
Considering all the above, if you are looking to buy just one or two investment properties, it is usually more tax efficient and simpler to buy them personally. If, however, you would like to build a property investment portfolio or start property trading, doing so through a company makes much more sense.
Whatever your situation, I advise you to consult a tax professional as there is a multitude of tax scenarios depending on your individual financial and family circumstances.