Buying property through a limited company: Setting up a property company

Using a limited company to acquire properties is becoming more common. David Miller explains the various implications and points out why this may be more suitable for some landlords than others. David also explains Family Investment Companies.

Full text transcript below:-

David Court: One of the discussions I know that happens in the cases with clients, is the vehicle within which they would acquire property. So, it can either be in an individual’s name, or in a limited company name, and I think there are variations. Is that something some have asked of you?

Rob Trotter: It never used to be, to be honest. I mean, it wasn’t a big topic of conversation, but increasingly so yeah I’m finding more and more people are asking me what are the benefits of buying property under a limited company. In all those instances, I will be referring them on to David and Johnston Smilie to explain the virtues of that kind of a purchase.

David Miller: It has become a lot more common, and a lot more talked about. I think one of the reasons for that is that limited companies pay a lower rate of tax than individuals, which can appear to be quite attractive. There’s no interest rate restriction for a company as there is for an individual, which again can make it quite attractive. You’ve got to look at the pros and the cons before embarking upon investing through a limited company. A limited company itself is a much more expensive vehicle to run. Accounting fees are more expensive than dealing with a sole trader, or a partnership.
I think one thing a limited company is not, it’s not a panacea for all evils. For existing landlords with a number of properties, some of which have a capital gain, it’s very, very difficult and very costly to transfer these properties into a company, because the landlord would be faced with potential capital gains tax on the transfer, and then having to pay land and building transaction tax and additional dwelling supplement to get the properties into the company. So, for an existing landlord, I can’t think of many situations where it would be a desirable option.
On the other hand, for a new landlord, starting off with some money, wanting to buy some properties, or even an existing landlord buying new properties; you might start them fresh and put them into a company. When you run a company, you’ve again got to think about how you extract money from the company. A limited company, although you might own all the shares, is a separate legal entity, and there’s always a tax consequence of transferring money from a company to an individual. So, you pay a salary, you have tax and national insurance. If you pay a dividend, you’ve got tax. So, you’ve got to think of the way in which you can get money out of the company.

Murdo McHardy: I suppose it might be a way as well for clients to think about having the family involved in owning the property, as well. With perhaps children or other family members owning a share in the company, and then the company investing in owning the property.

David Miller: There’s a new name, which has become quite popular in the last year or two, called Family Investment Companies. It’s not really anything, which is new. Actually, it’s a new name for something, which has been around for a number of years. It is having a limited company with different classes of shares. And the parents would have a different class of share to the children. Some might be entitled to a property appreciation. Some might be entitled to income, so you can structure a company out in quite a tax efficient way. We’ve seen it work particularly well with somebody acquiring a large amount of money, and being in business all their life, they’d been used to dealing with limited companies. They like the comfort of having a limited company, and directors and board meetings and things like that. And you feel you have an element of control over the assets, and indeed their family. And that can work particularly well.

David Court: The advantage of classic shares would be the control may retain everything by one individual.

David Miller: Absolutely.

David Court: But the income may be shared by others.

Rob Trotter: Is it of any specific set of criteria, where you would say it is sensible for you to buy property if you’re entering this into a limited company?

David Miller: I think as long as you can see the exit route, or you can get money out of the company in a tax efficient way. One of things we suggest to clients for example is that the shareholders and directors agree for the company to make pension payments on their behalf. That can be quite a tax efficient way of extracting money from a limited company in which the company would get tax relief, corporation tax relief on the pension payment, and the money flows into the shareholders own directors on a pension fund in a tax-free environment.
So, I think as long as you structure the transfer of the funds back from the company to the individual it can be a good idea. The original reason that we generally discouraged limited companies owning properties is the potential for a double tax charge. So, when the properties are eventually sold, it’s not you that’s selling the property Rob it’s your company. So, if there’s a gain the company would pay tax on that gain. The company has then got cash which it then has to give to the shareholder and you then have to manage the way in which you do that.

Murdo McHardy: I think it’s really relevant from a lending point of view, as well, because if you go back eight, nine, ten years, lending to limited companies or via limited companies for buy to lend was doable. And it was relatively available. I think that what we saw was after the financial crash, all these lenders pull out of the market almost completely … And it wasn’t … What wasn’t available. And now back to what Rob was saying, we’re seeing more and more demand for these things, as well. And definitely people are seeing the advantages for them. It’s not right for everybody by any means, but in the right circumstances there’s definitely more demand for it now than there was even in the last three or four years, you know?

David Miller: I think the one thing I would say is that no one can be sure of future changes in legislation, and whilst in the moment there’s been a change in legislation affecting tax relief for individuals and there’s not been for companies. That doesn’t mean to say there won’t be a change in legislation for companies. So, we need to be relatively flexible and nimble on your feet to adapt to any changes in legislation.

Murdo McHardy: Well, I think that that’s important, because again what we saw going back a number of years, when people had properties in the names of limited companies. And then all lenders pulled out of the market pretty much. They found it was really difficult to refinance those properties, because there was no lenders that they could move to. And they were maybe with lenders who weren’t paying the most competitive rates, so that type of scenario can arise. It’s just important people are aware of that.

Rob Trotter: One final point, I quite frequently get asked by investors, “If I set up a limited company, does that mean I avoid paying the additional dwelling tax?”

David Miller: No.

David Court: No.

Rob Trotter: So, that’s-

Murdo McHardy: And it’s the same rates as if you were an individual? The same 3%?

David Miller: Yes.

David Court: Yes.

Murdo McHardy: Yes, okay.

David Court: So, it’s still imposed on them in that event. So, the key to that is again back to consultation, I think isn’t it?

Rob Trotter: Yeah.

Murdo McHardy: Mm-hmm (affirmative).

David Court: Okay. Thank you.