Private property ownership changed significantly when a different set of mortgage rules was introduced in 2017, creating the need for limited companies so that property owners could take advantage of tax loopholes and flexibility. Although having a limited company is not a free ride to greater returns when it comes to investments, it does offer distinct advantages that make it more appealing for property owners to consider.

Understanding Limited Companies In The UK

A limited company in the UK is considered a separate legal entity from the people who own it. This legal separation provides property investors with added protection, and the responsibility of running the business falls into the hands of the “company director”. Limited companies set up in the name of properties that are to be rented out are known as Special Purpose Vehicles (SPVs) and are one of the most common instruments used in property investments. The primary reason most investors set up a limited company is to protect their personal assets from business debts. Only the limited company is liable for any debts or obligations. In short, the company in question owns the property—not the individual. 

Limited Companies and Their Advantages

Setting up a limited company for property investment may sound like a lot of work, but there are several advantages for property owners—mainly the shifting of responsibility and better tax treatment. These benefits are not typically available to individual property owners in the country. Take a look at some of the most prominent advantages of limited companies, listed below: 

• Corporation Tax Rates Vs Individual Tax Rates: If you are setting up a limited company, then you are liable to pay a corporation tax of 19 to 25 percent, depending on the total taxable profits of your company. This includes companies with profits over £250,000. On the other hand, if you don’t have a limited company set up, then you will pay between 20 and 45 percent on taxable profits as income tax. Not only does this significantly reduce your returns, but you are also incurring unnecessary losses through income tax. Setting up a limited company provides a certain level of tax relief as you’re only paying corporation tax. This is one of the biggest reasons many opt for limited companies for their property investments.
• Reduction in Mortgage Interests: Limited companies enjoy a certain level of marginal relief and mortgage interest deductions that are not available to individual property holders.
• Capital Allowance Claims: Another major advantage of having a limited company is that property owners can claim capital allowances on equipment, machinery, or even business vehicles. This allows investors to reduce some amount from their profits before paying tax. Examples of capital allowances for businesses include the 100% first-year allowance and the Annual Investment Allowance.

Setting Up A Limited Company In The UK

Now that you’re aware of the many advantages of limited companies, you’re eager to start your first one. If you have no idea where to begin, we’ve prepared a step-by-step guide to help you out: 

• Legal Risks: Before you start a limited company, you must be aware of the legal risks involved. Owners are liable for business debts only up to the total value of their financial investment in the company. This offers investors a high degree of protection if things go wrong. 
• Finances: Another important consideration for investors is finances. Although limited companies can apply for loans and other types of investments, there are specific rules that owners must follow when withdrawing money from the company. If the limited company is structured so that the company pays the owner a salary, then the company must be registered as an employer. Income tax and salary contributions must be deducted and deposited to HM Revenue and Customs. This also includes the employer’s National Insurance contributions. Anything in the business that is personally used by the owner or an employee must be registered as a benefit, and tax on that benefit must be paid.You can also use your limited company to pay dividends to your shareholders, but you must hold a directors’ meeting to declare the dividends, and the minutes of the meeting must be recorded. A dividend voucher must be prepared for every dividend paid, and copies must be kept in company records as well as provided to shareholders. Note that there is no tax on dividends from property investments under £500, but income tax applies to anything above that.

Now that you know what to expect, here’s a list of all the basic formalities that you need to follow:

• Naming The Company: Now that we’ve covered finances, the first step when setting up a limited company is choosing a name. Why is this important? Well, there are strict rules that you must follow when naming a limited company for property investment. The company name must not be similar to any existing company in the UK, and it must end with either “Limited” or “Ltd.”
• Director of the Company: You must appoint a director for the company. This is a legal requirement when setting up a limited company in the UK for property investment. Directors are legally responsible for running the company and keeping its records. While other employees, such as secretaries, can be hired, the director is solely responsible for the accounts and performance of the company. 
• Shareholders and Guarantors: A limited company must also have at least one shareholder or guarantor, depending on whether the company is limited by shares or by guarantee. Shareholders or guarantors may also act as the company director. 
• Prepare The Necessary Documents: Another crucial step in setting up a limited company is preparing the required legal documents for property investment, such as the Memorandum of Association (MOA) and Articles of Association (AOA). The MOA is a legal document signed by all initial shareholders, and the AOA outlines the rules and structure of the company. 
• Record Keeping: A limited company must keep detailed records of finances and all other relevant aspects of its property investment activities, including information about “people with significant control”. Failure to maintain proper records may result in fines or disqualification of company directors.
• Register the Company: Finally, you will need to register an official address and select an SIC code for your company. The SIC code determines what your company does and confirms the purpose of the property investment. This registration is completed with Companies House, either online or by post.

Although the process sounds complex, it can be done smoothly if you have an experienced investment company to guide you. Global Phoenix Group has been helping investors set up limited companies for property purposes for years, and our expert team is ready to help you create your first limited company in the UK. Give us a call and book your first consultation today!

References:

1. https://www.commercialtrust.co.uk/news/buying-property-via-a-limited-company/
2. https://www.provestor.co.uk/guides/limited-company-setup
3. https://www.gov.uk/limited-company-formation/choose-company-name
4. https://www.ukpropertyaccountants.co.uk/setting-up-a-limited-company-a-complete-guide/
5. https://fabrikpropertygroup.com/how-to-setup-a-property-investment-company-step-by-step-guide/
6. https://tradingeconomics.com/united-kingdom/corporate-tax-rate
7. https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company
8. https://www.gov.uk/limited-company-formation