Should You Hold Property Investments in Your Own Name or a Limited Company?
One of the most crucial decisions for property investors is whether to hold their investments in their own name or through a limited company. This decision significantly impacts tax liabilities, cash flow, and long-term returns. Below, we’ll explore the pros and cons of each approach, key tax implications, and when it may be worthwhile to incorporate or restructure your portfolio.
Holding Property in a Limited Company
Using a limited company, particularly a Special Purpose Vehicle (SPV) set up specifically for property investments, can be advantageous for investors planning to build a portfolio of three or more properties. However, the structure comes with its own complexities.
Key Advantages of Limited Company Ownership:
1. Full Deduction of Mortgage Interest:
One of the most significant advantages of holding property in a limited company is that mortgage interest is fully deductible as a business expense. Unlike individual ownership, where relief is restricted to the basic rate of tax, companies can deduct the full cost of mortgage interest, reducing taxable profits.
2. Corporation Tax Rates:
Profits made within the company are subject to corporation tax, currently 25% for most companies in 2025. This is significantly lower than the higher personal tax rates (40% or 45%) many landlords face when holding property in their own name.
3. Easier Portfolio Growth:
For those looking to scale their portfolio, limited companies can make reinvestment easier. Retained profits can be used to purchase additional properties without first paying personal tax, helping to grow your portfolio more efficiently.
4. Succession Planning:
Shares in a limited company can be passed on to heirs in a tax-efficient manner, making it easier to manage succession planning compared to individually held properties.
Key Disadvantages of Limited Company Ownership:
1. Double Taxation:
One of the biggest downsides to limited company ownership is double taxation. If the company sells a property, it will pay corporation tax on any capital gain. If you want to extract that money from the company, you’ll pay further personal tax (e.g., via dividends).
Example:
• A company sells a property for a £100,000 gain.
• Corporation tax (25%) = £25,000.
• If the remaining £75,000 is withdrawn as dividends, the individual could pay up to 39.35% in dividend tax (higher-rate taxpayers), reducing the net gain significantly.
By comparison, an individual investor selling the same property would only pay Capital Gains Tax (CGT) directly at 18% (basic rate) or 24% (higher rate) after October 2024.
2. Higher SDLT Costs:
From October 2024, companies purchasing residential property must pay an additional 5% Stamp Duty Land Tax (SDLT) surcharge on top of the standard rates. This replaces the previous 3% surcharge for additional properties. This added cost can make property acquisition significantly more expensive for companies.
3. Administrative Burden:
Companies require formal accounting, tax filings, and compliance with Companies House regulations, increasing administrative complexity and costs.
4. Limited Mortgage Options:
Although improving, the range of buy-to-let mortgages available to limited companies is often more restricted than for individual landlords, with higher interest rates.
Holding Property in Your Individual Name
For many first-time investors or those with only one or two properties, holding property in their personal name may seem simpler. However, tax changes in recent years have made this less attractive for higher-rate taxpayers.
Key Advantages of Individual Ownership:
1. Simplicity:
Owning property in your personal name is straightforward. There’s no need to file corporation tax returns or maintain separate company accounts.
2. No Double Taxation:
When selling a property held in your name, you pay CGT directly on the gain at the new rates from October 2024 (18% for basic-rate taxpayers and 24% for higher-rate taxpayers). There is no second layer of tax when you access the proceeds, as is the case with a company.
Key Disadvantages of Individual Ownership:
1. Mortgage Interest Relief Restrictions:
Since 2020, landlords owning property in their own name can only claim mortgage interest relief at the basic rate of tax (20%). For higher-rate taxpayers, this significantly reduces profitability.
Example:
• Rental income: £20,000.
• Mortgage interest: £12,000.
• Only £2,400 (20% of £12,000) can be claimed as tax relief, even if you’re paying 40% tax on the income.
This means you could face a tax bill on “profit” that doesn’t exist after covering mortgage costs.
2. Taxable Income Exceeding Cash Flow:
Because of the mortgage interest restrictions, it’s possible to be taxed on income that is effectively wiped out by expenses. This is particularly problematic for higher-rate taxpayers with large mortgages.
Incorporating an Existing Property Portfolio
If you already own a portfolio in your own name and are considering transferring it into a limited company, you should carefully evaluate the costs and tax implications. Incorporation often triggers substantial tax liabilities.
Key Considerations:
1. Capital Gains Tax (CGT):
Transferring property to a company is treated as a disposal for CGT purposes. The gain is calculated based on the property’s market value at the time of transfer, even if no money changes hands. With CGT rates increasing from October 2024, this can lead to a significant tax bill.
2. Stamp Duty Land Tax (SDLT):
The transfer is also subject to SDLT, including the new 5% surcharge for company purchases. For a portfolio of multiple properties, this cost can be substantial.
3. Incorporation Relief:
If your portfolio is actively managed as a business (e.g., involving multiple properties, regular tenant interactions, and bookkeeping), incorporation relief may defer CGT. However, qualifying for this relief requires meeting strict criteria and should be reviewed with a tax adviser.
Tax Planning Tips for Property Investors
1. Joint Ownership with a Spouse:
Transferring property into joint ownership with your spouse can help reduce tax liabilities by using both partners’ tax allowances and lower-rate tax bands. Transfers between spouses are free of CGT, but if the property has a mortgage, SDLT may be payable on the portion of the debt being transferred.
2. Using Form 17 for Income Allocation:
If property is jointly owned with a spouse, rental income is usually split 50:50. However, by filing a Form 17 with HMRC, you can allocate income based on actual ownership percentages. For example:
• Ownership is adjusted to 99% in the wife’s name (a basic-rate taxpayer) and 1% in the husband’s name (a higher-rate taxpayer).
• Rental income can then be allocated 99:1, significantly reducing the overall tax liability.
This allows for more efficient tax planning while maintaining joint ownership.
3. Partnerships with Non-Spouses:
If you co-own property with a business partner or friend, HMRC may treat it as a partnership. This allows profits to be split flexibly, not necessarily according to ownership shares. However, partnerships must file a formal partnership tax return, adding some administrative complexity.
Conclusion
The choice between holding property in your own name or through a limited company depends on your investment goals, the size of your portfolio, and your tax position. For smaller portfolios, individual ownership may be simpler and less costly. However, for those looking to scale up, the tax benefits of a limited company – particularly full mortgage interest relief – often outweigh the downsides.
That said, incorporation is not always straightforward, particularly for existing portfolios. Double taxation, SDLT surcharges, and CGT liabilities can erode the benefits, making careful planning essential. With the October 2024 tax changes, including higher CGT rates and the 5% SDLT surcharge for company purchases, professional advice is more important than ever. By working with a tax specialist, you can structure your property investments to maximize returns and minimize tax liabilities.