Should You Hold Your Properties in Your Personal Name or Set Up a Limited Company?

We’re tackling a big question faced by many property investors: should you hold your properties in your personal name or set up a limited company? Both options have their pros and cons, and in this blog, we’ll break down the key considerations to help you make an informed decision.

Personal Name Ownership

Impact of Section 24 on Mortgage Interest Relief

One of the biggest changes for landlords in recent years has been the introduction of Section 24. This legislation restricts the amount of mortgage interest that can be deducted from rental income before tax. Instead of deducting the full mortgage interest, landlords now receive a basic rate tax reduction, which can significantly increase tax liabilities, especially for higher-rate taxpayers.

Tax-Free Allowances

Owning properties in your personal name allows you to take advantage of various tax-free allowances. These include the personal allowance, which lets you earn a certain amount of income tax-free each year, and the capital gains tax (CGT) allowance, which applies when you sell a property at a profit. These allowances can help reduce your overall tax bill.

Capital Gains Tax on Transferring Properties

If you decide to transfer properties from personal ownership to a limited company, you may face a capital gains tax bill based on the property’s market value at the time of transfer. This can be a significant cost, so it’s important to plan carefully if you’re considering this move.

Differences in Mortgage Rates

Mortgage rates can vary significantly between personal and corporate borrowers. Typically, individuals can access more competitive rates compared to limited companies, which might face higher interest rates. This can affect the overall profitability of your investment.

Full Cash Purchases and Tax Situations

If you’re in a position to make full cash purchases without the need for mortgages, your tax situation can change considerably. Without mortgage interest to deduct, Section 24 becomes irrelevant, potentially making personal ownership more attractive.

Limited Company Ownership

Section 24 Mortgage Cost Restrictions Don’t Apply

One of the main advantages of using a limited company is that Section 24 restrictions on mortgage interest relief do not apply. This means that all mortgage interest can be deducted as a business expense, potentially reducing your corporation tax bill.

Benefits of Corporation Tax

Profits within a limited company are subject to corporation tax, which is often lower than the higher rates of income tax. This can make holding properties in a company more tax-efficient, especially for higher-rate taxpayers.

Tax Efficiency of Reinvesting Profits

Limited companies offer greater tax efficiency for reinvesting profits. Instead of withdrawing profits and facing personal income tax, you can reinvest within the company, allowing for greater growth and expansion of your property portfolio.

Extra Admin Involved

Running a limited company comes with additional administrative responsibilities. You’ll need to file annual accounts, submit corporation tax returns, and maintain proper records. This can mean higher accountancy fees and more time spent on paperwork.

Long-Term Exit Strategy

It’s crucial to consider your long-term exit strategy when deciding between personal ownership and a limited company. Selling properties within a company can be more complex and might involve additional tax implications. Planning your exit strategy from the start can help avoid unexpected costs and complications.

Which Option is Best for You?

Deciding whether to hold properties in your personal name or set up a limited company depends on your individual circumstances, financial goals, and long-term plans. Here are some key points to consider:

• Income Level: Higher-rate taxpayers may benefit more from the tax efficiencies offered by a limited company.
• Portfolio Size: Larger portfolios can often justify the additional admin and accountancy costs associated with a limited company.
• Investment Horizon: Your long-term plans, including retirement and exit strategy, will influence the best structure for your investments.
• Mortgage Availability: Access to competitive mortgage rates can be a decisive factor, especially for highly leveraged investments.

Our Take on the Best Approach for Landlords

There’s no one-size-fits-all answer, but our general advice is to carefully assess your current situation and future plans. Speak with a tax advisor or property accountant to get tailored advice and run the numbers for both scenarios. We offer an exclusive service that introduces you to our ‘Power Team,’ consisting of a property accountant, mortgage broker, and solicitor. This service is available only to our online members. To learn more about it, simply join and explore our members area.

For many landlords, starting with personal ownership and transitioning to a limited company as their portfolio grows can offer a balanced approach, taking advantage of the benefits of both structures over time.

Remember, the right choice depends on your unique circumstances, so take the time to understand all the implications before making a decision.