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Posted 21 May 2024

Buying Property Through A Limited Company Or A Trust

buy / house / mortgage

Thinking of buying property through a limited company? I'll share the advantages and disadvantages with you in this comprehensive guide.

If you’re thinking about buying property through a limited company, you probably have lots of queries.

In this guide I’ll cover some of the main advantages and disadvantages of this approach, plus I’ll explain how the process works. I’ll also explore a popular alternative – buying property through a trust.

There are more than five million limited companies in the UK, according to government statistics – with 500,000 new ones set up every year. But can a limited company buy a house, technically?

It can indeed, but while this can be a practical option for some people, it doesn’t make sense for everyone.

You may benefit from some tax efficiencies, but setting up then running a company to buy property is not a straightforward process.

First of all, how does the process work?

Buying a property through a limited company: How it works

If you buy property through a limited company, this entity is the legal owner of the property, rather than an individual.

The shareholders own the company, not the property itself. The company is responsible for managing and maintaining the property, paying the taxes and so on.

There are potential tax advantages to this arrangement. For example, if the company sells the property, it could be able to retain any profits without incurring personal capital gains tax.

However, as you might expect, purchasing a home via a company is more complicated than buying a property as an individual. You may need to work with an accountant to set up the right type of company.

For instance, you may need to set up a special purpose vehicle (SPV), to isolate financial risks – more on this shortly.

Planning to buy a house to renovate? Here’s my guide on property in need of renovation – the key considerations.

Setting up a company to buy property

First of all, decide who to include in your company as directors or shareholders, if anyone. 

You could go it alone or work with a business partner, for example. You could include your spouse and children, but if that’s the case, you may want to consider setting up a trust instead – I’ll cover this later.

Here is a short summary of the process for setting up a company in the UK. This is a simplified overview – I recommend seeking professional advice for a full understanding of the implications based on your specific circumstances.

  • Choose a unique name: Run an availability check on the Companies House website, making sure no-one else has already registered your chosen name.
  • Appoint directors and shareholders: The company needs at least one director and shareholder, although they can be the same person.
  • Prepare documents: These include the Memorandum of Association and the company’s Articles of Association.
  • Register with Companies House: Submit your company name, registered address, the Standard Industrial Classification (SIC) code and the incorporation application fee to Companies House for registration.

It’s important to get your SIC code right so if this is new to you, seek the advice of an accountant.

If you’re building an investment portfolio via a buy-to-let mortgage, lenders prefer you to hold properties inside a SPV with the SIC code 68209, according to Provestor. If you’re planning to buy, renovate and sell properties, they advise using the SIC code 68100.

Make a robust plan to comply with the company’s administrative obligations – for example, annual accounts and confirmation statements.

Advantages

Here are three of the main advantages to buying a house through a limited company:

  • Tax benefits: If you’re a private landlord, you don’t pay income tax on your personal allowance – £12,570 at the time of writing – then you pay 20% on profit from £12,571 to £50,270, 40% between £50,271 and £125,140 then 45% above that. But if you own property through a limited company, you pay corporation tax on your profit instead. At the time of writing, that’s 19% for companies with profits under £50,000 and 25% for those with profits above £250,000.
  • Mortgage relief: Pre-2017, landlords in the UK could deduct interest from mortgage payments as an expense. Since then, the government has imposed stricter rules and at the time of writing, landlords only receive 20% tax relief on mortgage interest. But for a limited company, mortgage interest counts as a business expense, so you can deduct the cost from the profits before paying corporation tax.
  • Inheritance tax planning: If your family members are shareholders in the business, you can pass the property onto them without incurring inheritance tax. At the time of writing, the government charges inheritance tax at 40% above £325,000. In contrast, it is not easy to gift property later in life without incurring substantial inheritance tax, as you need to pass it on at least seven years before tax liabilities are due.

So, can a business buy a house in the UK? Yes it can – and there are several notable advantages to doing this.

Looking to let out the house once your company has bought it? Here’s how to rent out your house.

Disadvantages

While all of the above sounds good, there are disadvantages too.

  • Access to mortgages: Most buy-to-let mortgages are not available to companies – lenders who will provide one, want a personal guarantee, Phillips Law confirms. This gives a company director the same amount of personal financial liability as an individual landlord and the mortgage rates may also be higher.
  • Administration: By running a limited company, you need to hold annual general meetings, file annual accounts, keep accurate records and follow regulatory requirements – likely incurring additional costs.
  • Transferring ownership: Should you wish to move back to personal ownership, you’ll need to transfer or sell the property, incurring the usual costs such as stamp duty land tax, capital gains tax, legal fees and so on.

Also factor in the costs of setting up and running your company – such as registration fees and accounting costs.

You may benefit from economies of scale if buying several properties, but for one purchase, buying through a limited company may add more complexity than you’re hoping for.

As an alternative to setting up a limited company, you could consider putting the property into a trust:

Buying property through a trust

Trusts can provide an efficient way to handle tax too. Trusts tend to have three component parts:

  • Trustor – the person putting the property into a trust
  • Trustee – someone with control over the property
  • Beneficiary – the person who will benefit from the property

In contrast to a trust, if gifting a property, third parties in financial disputes or ex-partners in a divorce can try to claim it. But with a trust, only named beneficiaries can occupy the property, making it a good way to provide adult children with their own home, Keystone Trust reports.

There can also be some potential stamp duty savings in certain situations. And if beneficiaries live in the property, it can trigger private residence relief, exempting the property from capital gains.

However, there are still tax obligations in a trust. As a trustee, you pay a charge on every 10 year anniversary of the trust’s foundation and it’s complicated to calculate, the government confirms.

Trusts are not exempt from inheritance tax. The amount of inheritance tax you pay varies by trust type – for detailed information, see the government guide on trusts and inheritance tax.

And as with buying property through a limited company, it can be difficult to get a mortgage for a trust-owned property, according to Spire Solicitors.

Final thoughts: How to buy a house through your business (UK)

I hope you found this guide useful if you’re thinking about buying property through a limited company.

It’s best to weigh the downsides against the potential advantages, depending on your specific circumstances, before deciding if it’s the right option for you. For other helpful guides please check out the Fine Living blog.

Recent articles include, how do I find out what restrictive covenants are on my property? And – how much does it cost to extend a lease on a flat in the UK?

No matter how you buy a property, make sure you ask the estate agent lots of questions first before making an offer.

Here are 16 questions to ask when viewing a house and a first-time buyer checklist. I’ve also written a guide on the different things that can hold up an exchange of contracts.

For any queries, Fine Living is here for you. Take a look at this portfolio of featured homes for sale and please don’t hesitate to get in touch with any queries.

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