Property purchases using companies have become increasingly popular in recent years.
If you are a business owner, contractor, or independent professional who operates through a company, you may have contemplated purchasing property through your company. Property purchases using companies have become increasingly popular in recent years. For most higher-rate taxpayers, acquiring rental properties through a company makes sense. It offers complete tax savings on mortgage interest, as well as lower tax rates and more flexibility.
Key considerations before purchasing property through a company
- Your income: If the property is bought by an individual, he ends up paying a higher tax on the property acquisition. However, if it’s through a company, taxes get reduced as they fall under Corporate Tax.
- Whether you already own property: One should consider if it is advantageous to transfer property to your business. This will differ depending on the properties in their portfolio.
- Whether you already own a company: If a person does not already own a company, he should consider whether it would be worthwhile to form one and, if so, how much it would cost to run it.
A company is legally recognized as a separate legal entity from its owner, which means that the company’s assets are owned by the firm itself. When it comes to property investment, engaging a company might have a number of advantages; not only financial ones.
It’s true, the tax benefits of investing in property through a company are almost always better than owning property individually, but there are other compelling reasons to do so.
- Interest And Taxation on Mortgage: Individual property investors can no longer claim mortgage interest as an allowable expense; instead, they can claim a deduction under section 24, subject to a limit, whereas companies that hold property can continue to claim interest without restriction.
- Companies have a significantly lower tax rate than individuals who pay income tax: Obviously, one has to pay income tax when you access funds from your company, but it is very likely that its be better off doing so from a tax-efficiency viewpoint than paying high levels of income tax as in the case of an individual.
- Creditors do not have access to your personal assets: Creditors can only access the company’s assets, so if the company’s financial situation deteriorates, the people behind the company, namely the directors and shareholders, will be safe from creditors, now this is particularly useful if someone is thinking to buy a property through a company
- One can retain the company profits and reinvest them without paying more tax: When you own a property in your personal name, you must pay tax on any profit you make from that property, even if you intend to reinvest the profits in more property. With a company, all of your profits (after corporate tax, which, as previously stated, is lower than income tax) can be kept in the company and used to reinvest.
It’s always advantageous to adopt the company route for buying a property as it also opens doors when approaching lenders for loans as you build your property portfolio. Creditors are more likely to offer favourable loan terms if you demonstrate a strong portfolio of investment properties and a well-managed company.