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Buying property as an individual or a limited company

Trader

If you are a trader, it is generally better to buy a property through a limited company.

This is because when trading properties as a limited company you will pay corporation tax on your profits.

If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you’re taxed at the higher rate, will be significantly higher.

As an individual, you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it – see article running a trading business vs investment business

Investor – holding as a company

There are a few reasons why you might want to hold property as a company rather than yourself.

TAX TREATMENT OF PROFITS

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

You will still be taxed on the dividends if you take profits out of the company, but there’s flexibility: you can time your dividend payouts, distribute them to family members who are only basic rate taxpayers – or just leave the profits within the company to buy the next property.

TAX TREATMENT OF MORTGAGE INTEREST

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they’ll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property. The change is being phased in from April 2017 – see article Mortgage relief for higher rate taxpayers

Investor – holding as an individual

DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT

If you’re leaving your rental profits in the company, you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties. However, if you need to take the money out, you’ll be taxed on the dividends you take. That means you’ll be paying corporation tax first, then paying a large amount of tax on the dividend.

Other Resources

Who Needs To Register For Vat?

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How Do I Calculate VAT?

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