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Should I hold my rental properties in a limited company?

If you’re thinking of investing in rental property, it’s worth considering whether a limited company is right for you. A limited company can offer some significant benefits over other investment vehicles such as buy-to-let mortgages and personal accounts. Here we explore how to take advantage of these benefits and how it could help your long-term wealth.

Why use a company to own rental property?

There are a number of reasons why you might want to hold your rental properties in a limited company. Here are some of the most common:

  • Protecting your assets – By holding your property in an entity, you can protect its value from creditors if you ever get into financial trouble. You can also look to set up Trusts when it comes to limited companies, which will reduce and even completely remove inheritance tax.
  • Tax breaks – There are several tax breaks that come with owning investment properties through an entity rather than directly as an individual, including capital gains tax deferment and relief on mortgage interest payments if they’re paid by the company rather than yourself personally. You may also be able to claim back losses from previous years if this has been done before; however, this is something that needs careful consideration before making any changes since HMRC will expect documentation proving any deductions claimed were valid at the time they were made.

How is a limited company taxed on rental income?

Any profit from your rental properties will be subjected to the same tax as profits made within any other limited company. For profits under £50,000, you’ll be tax at 19%, while anything from 1st April 2023 is to be taxed at 25%. This is a tax on profits of the company as opposed to a tax on rental income which would apply if the property was held in private names as a buy-to-let property.

If you plan on having several properties, it could be wise to set up more than one limited company, to ensure you keep your profits under this threshold.

Any net profit can be taken out as a dividend, which is a cost-effective way of paying yourself. A basic rate taxpayer will pay 8.75% instead of 20%, and 32.5% instead of 40% at a higher rate tax band.

A quick guide to the tax rates you need to be aware of when owning buy-to-lets.

When it comes to tax, there are many factors that can affect how much you pay. For example:

  • Your income tax rate depends on your total taxable income.
  • Capital gains tax rates depend on whether or not you have sold any investments during the year.
  • Corporation tax rates vary depending on which type of company you set up and what its main purpose is (e.g., trading vs manufacturing).

How can I benefit from holding my rental property in a limited company?

You may also be able to benefit from holding your rental property in a limited company, especially if you’re looking to take advantage of tax breaks or asset protection. Here are some reasons why:

  • Tax breaks – You can claim expenses associated with owning and running your business against the profits made by renting out the property. This means that any income received from renting out your property will be taxed at a lower rate than if it were held personally, meaning more money in your pocket.
  • Asset protection – Limited companies are protected against creditors’ claims (including those brought by tenants). They aren’t protected from divorce though, unless your limited company is owned by a trust, which is worth considering as this brings you even greater levels of protection.

Is there anything else I need to know about owning rental properties in a limited company?

It’s worth noting that limited companies are less transparent than sole traders, which means they’ll cost more in terms of accounting fees and tax returns. Keep this in mind when deciding whether or not owning rental properties through one makes sense for you.

Finally – while owning rental properties through a limited company may be an option for some people (especially those who want greater legal protection), it’s important that anyone considering this strategy fully understands its pros and cons first before making any decisions about their investments. For information on the best options for your situation, speak to a member of our trusted team today.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.