What is a Property Company?
A property company is set up for the sole purpose of owning property without the investor having to own the property directly. Instead, the property investor owns the company, and the company owns the property. Legally, the property company is a separate entity to the owner or investors in the company.
Setting up a property company is known as incorporating, and is often used for buy to let and for property development projects.
Why Set Up a Property Company?
Property companies are often set up for their financial efficiency. Owning a property through a company can be more profitable and incur less tax than owning the property directly.
Also, by not owning the property directly, the landlord’s personal liability is diminished.
What are the Advantages and Disadvantages of Setting Up a Property Company?
Like any financial endeavour, setting up a property company should only be done after researching and fully understanding what this entails. Here are some of things any landlord seeking to incorporate should be aware of:
Corporation Tax and Income Tax
Companies and individuals pay different taxes. Companies pay Corporation Tax on their profits, while individuals pay Income Tax and National Insurance Contributions on their income. Currently, having a company own a property incurs less tax than if an individual owns it.
Corporation Tax will be increasing in 2023, but this should still apply.
Additionally, company dividends and salaries provide methods to withdraw money from the property company. If done correctly, this is the most tax efficient way of owning property.
Ofsetting Mortgage Interest Costs Against Income
Section 24 of the Finance (No.2) Act 2015 restricts the mortgate interest that individuals can claim against tax. Limited companies do not have these restrictions, and can still claim the interest they pay on buy to let mortgages as an expense against income.
Cash Flow
Owning a property company allows you to retain profits and reinvest them in the company, providing cash flow advantages.
Mortgage Availability
One potential disadvantage is that fewer lenders offer mortgages to limited companies than to individuals. Those lenders that do lend to property companies may be restrictive on the number or value of the properties in the company portfolio.
Mortgage Costs
Mortgage interest rates and arrangement fees are often higher for limited companies than individuals.
Personal Guarantees
Directors of limited companies may have to provide personal guarantees when taking out mortgages.
A personal guarantee is an agreement that the company directors will take on the repayments in the event of the property company being unable to.
Stamp Duty
Companies purchasing property must pay a 3% Stamp Duty surcharge.
If the property is valued at more that £500,000, then the company may also have to pay a higher rate of 15% Stamp Duty, and an Annual Tax on Enveloped Dwellings (ATED). There are exemptions, so it is best to research this in each case.
Conveyancing
There are more checks for conveyancers to carry out for a company than for an individual. Directorships, shareholdings, articles of association, and more add to the work the conveyancer or solicitor needs to carry out.
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.
Pensions
It is possible to use pension investments with a property company. You can generate tax-free income with a Small Self Administered Scheme (SSAS) by investing in commercial property or residential developments. This income is not taxed until it is withdrawn.
Sale Flexibility
Property owned by the company can be sold by selling or transferring the company itself, instead of the property. This can in many cases be simpler and quicker, and may avoid the buyer having to pay Stamp Duty.
Collaboration
Investors can collaborate on projects much easier through a company.
Limited Liability
Personal liability for any company debts is limited, much like any other limited company. Shareholders would not be liable for the entire company debt.
Spread Investments
Investments can be spread between property companies, even to having one property per company. This protects the other properties if one should fail for any reason.
Running Costs
Limited companies require set up fees and running costs, which would be more expensive than working as an individual.
Record Keeping
Limited companies require stronger and more accessible records than sole traders. There are legal requirements to running a limited business that, if not carried out, can result in fines or other punishments.
Confidentiality
While individuals can keep their business dealings private, limited companies must publish their finances and ownership information to the public domain. If privacy is important, this may not be desirable.
Potential Legislation Changes
If property legislation for companies is updated in the future, any properties held by the property company will be affected. If the circumstances become strongly unfavourable, and you wish to revert to private ownership of your properties, it can be a difficult procedure.
Our Verdict
Forming the property company is easy – you can do it yourself and register it with Companies House. Managing the company, and making the right decisions for your investments, is more difficult and requires care and knowledge.
However, we do not suggest you jump straight and do it yourself.
As with everything property-related, we suggest spending some time researching the subject. Speak to your financial advisor, or other property expert, to ensure there are no nasty surprises waiting for you further down the line.
Only once you have all the information, and you are certain this is the right step for your investments, should you proceed.
