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According to mortgage brokers, up to 80% of new mortgage applications are now for limited companies.

In the past someone buying a property through a limited company was quite rare, but since the Government changed the way mortgage interest is treated in the 2015 Budget things have changed quite dramatically.

Mortgages available to Limited Companies have traditionally been more expensive, harder to get and had lower borrowing limits.

While the options available compared to personal mortgages is still limited the situation is improving as lenders adapt to the changes in the industry.

So is buying your next property as a limited company the the right way to go for you?

It very much depends on your circumstances and your plans for any property you buy.

Please note this is not intended to be financial or tax advice and always make sure you take the advice of a professional tax advisor before making any decisions.

Should I use a limited company when buying a property to flip?

If you are planning on buying a property to flip and sell on quickly for profit then it makes a lot of sense to buy as a limited company.

If you buy it as a company your profits will be taxed as corporation tax (currently 19% at time of writing) but if you buy as an individual any profits with be charged as income tax which if you are taxed at the higher rate (40%) is likely to be much higher.

You then have to factor in whether you want to take the profits out of the company or roll then over into the next project.

If you are rolling them over then it makes perfect sense to use a company.

If you want to take the profits outs your dividend will be taxed at the current rates (7.5% in you far win the lower tax bracket but a large 32.5% if you are in the higher tax bracket).

Of course you can time when you release these profits to keep the tax down, or you could pay them to a family member in a lower tax bracket.

You also need to factor in the extra time and accountancy costs that operating as a limited company will incur.

Which is the best option depends of your own circumstances so make sure you crunch all numbers and see which works for you.

Should I use a limited company when buying a property to rent out?

If you plan on buying to let and collect rent over a long period of time then there’s a few more things to consider.

If you buy your rental property as a company any profits you make from rent will be charged as corporation tax rather than charged as income tax.

This can offer a large saving if you total earnings are more than £50,000 and you are therefore charged at the higher 40% rate of income tax.

Also as of April this year, mortgage interest will no longer be an allowable expense for individual property investors – but companies that own property will still be allowed to claim for it.

The changes have been phased in since 2017 and it essentially means that if you currently pay income tax at the higher 40% rate and you are buying property with a mortgage then your tax bill will be higher if you buy the property in your own name rather than using a limited company.

However remember you will still be taxed on the dividends if you take profits out of the company but you have the option to stagger your payments to make the payments more efficient, pay them to a family member or leave them in the company for your next investment.

Therefore the major factor is whether you are wanting to take a regular income from your portfolio or keep the money in the business.

If you want to take a regular income you will need accept that you will lose and gain tax in some areas. Crunch the numbers and see which works best for you.

What about inheritance tax when buying a property with a limited company?

When it comes to exiting your buy to let property or portfolio then using a limited company gives you more flexibility for mitigating the effect of inheritance tax.

Limited companies open up many more options for exit strategies such as shares and trusts than buying a property in your own name would.

Also any delayed profits can be released from the company when your income is lower thus reducing how much they are taxed.

If passing your properties on to family members is important to you, holding them within a company could offer you large Inheritance Tax savings.

Conclusion

Whether you buy your property as an individual or a limited company very much depends on your circumstances.

Make sure you consider how much income you have and what tax bracket your earnings will fall in, whether you want to live off the property income or invest it, are you buying to rent or to flip, the costs of running a limited company, the mortgage terms available to you and your exit strategy.

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At M3 Commercial Finance we have access to below market value properties and passive property investments all over the UK as well the ability to secure you property development finance.

Contact us today to discuss your need.

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