The benefits of investing in UK property through a limited company

October 10, 2024

Investing in UK property is a popular, profitable option for people from around the world. House prices are rising at their fastest rate since 2022 and rents are going up faster than wage growth.

But what’s the best way to do it?

Investing as an individual is the traditional way to buy UK property, but you can also do it through a limited company which you own and operate. That approach comes with some unique benefits and could be the right choice for you depending on the circumstances.

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Mortgage Rate Relief

One of the biggest incentives to buy property through a limited company is the potential for mortgage cost relief.

Since April 2020, landlords in the UK have been unable to deduct some mortgage costs from their rental income to reduce their tax bill.

Instead, landlords now receive a tax credit based on 20% of mortgage interest payments. This is a less generous tax credit than the previous system for higher rate taxpayers who in effect received 40% tax relief on mortgage payments.

That type of tax relief had previously been a big advantage of investing in UK property, but its removal increased costs for many landlords who financed their investments through borrowing.

However, if you buy through a limited company the situation is different.

If you are operating a business, mortgage costs are a business expense and can be declared as such. They are also separate from rental income which becomes the income of your business.

This offers the potential for savings through additional tax relief, which in turn goes to increase your return on investment.

It is worth noting that mortgages for business can come at a higher rate than personal mortgages, but depending on your situation it may still work out better to invest through a limited company.

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Income Tax vs Corporation Tax

A related benefit of investing in property through a limited company is the difference between income tax and corporation tax in the UK.

The basic rates payable on your rental income as an individual depend on your total income. Many landlords will be higher rate payers, putting them in a more expensive income tax bracket:

Personal allowance – Up to £12,570, 0% rate
Basic rate – £12,571-£50,270, 20% rate
Higher rate – £50,271-£125,140, 40% rate
Additional rate – Over £125,140, 45% rate

Put simply, if you’re in that higher rate then 40% of your rental income will be taxed. Depending on your mortgage repayment rate, this could leave you without a huge monthly rental income from your properties.

On the other hand, if you invest through a limited company your rental income will be classed as corporate income and come under corporation tax which is currently at 25% - much lower than income tax.

Likewise, you will then take that money out of the limited company as dividends which are also taxed at a lower rate than income tax.

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Flexibility and Diversification

If you don’t want to take the profit out straight away, keeping it in the limited company gives you flexibility options in the future.

For example, if you use the funds in the company to purchase a second (or third, fourth, or fifth…) property without taking them out, you can amplify the tax relief advantages.

You could also diversify through your limited company and invest in Purpose-Built Student Accommodation (PBSA).

Rather than getting taxed at the higher rate and then reinvesting what’s left, you can take advantage of the lower corporation tax rate and have a much bigger cash reserve to use for your next investment.

Then, the returns from that additional property will also benefit from the lower corporation tax rate, and so on. If your strategy is to build a large portfolio over time, choosing to invest through a limited company can be a great way to achieve that goal more quickly and with lower costs.

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Enhanced Personal Protection

Finally, investing through a limited company gives you greater personal protection in a similar way to any other business.

Financial risks are lessened so long as you act in good faith and fulfil the duties of a company director properly. For example, you may not be personally liable for any debt the company accrues in the event that your investments don’t work out.

All investments are risky, but operating a limited company can help reduce that risk, potentially making property investment a more appealing prospect.

While the UK property market is at the beginning of a new cycle, it can offer investors peace of mind if they are more protected from any market downturns in the future.

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Remember: The benefits depend on your personal circumstances

As with any property investment, whether using a limited company will benefit you depends on your unique circumstances. There is no catch-all advice that applies to everyone.

Louisa Sedgwick, Paragon Bank’s commercial director of mortgages, says: “Owning properties through a limited company can enable landlords to offset finance costs, such as mortgage interest, against rental income.

“It’s wise for borrowers to seek professional advice because incorporation may not be the best route for all landlords and the benefits can vary based on individual circumstances.”

Make sure to seek advice from your financial advisor who will have the best knowledge of your circumstances, especially when it comes to questions around taxation rates. Additionally, get input from a professional property expert who can help you find the right investment to suit your specific needs.

Browse our range of available UK property investment opportunities today and get in touch with the team for more information.

The benefits of investing in UK property through a limited company

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