Buying Property Through a Limited Company as a Property Developer

Setting up our property development company efficiently is important and the question of whether we should be buying property through a limited company comes up often.

Like most questions in property… the answer is often, “it depends”, and this is true to whether you should be buying your develop sites through a limited company

Its something we should consider at the start of our property journey and getting this correct from the beginning will save us on costs (mainly tax) further down the line.

In this short article, I will take you through the following:

  • Property trader v Property Investor
  • Buying property through a limited company
  • Alternatives to limited companies

So lets get started and consider the first question that needs to be answered.

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Property Trader or Property Investor..?:


When we are starting out property developer journey and considering our options we need to establish in out business plans whether we are a property trader or property investor.

Whats the difference..?

Well… a trader is someone who buys a property, adds value (through development) and then sells for a profit. An investor will buy, develop and then hold to enjoy the income stream over a period of time as an investment.

Why is this important?

It all comes down to HMRC and tax. How the transaction is taxed will depend on the intention of the developer and whether we intended to trade or invest.

So which is better to be?

This depends on a number of factors, including whether the taxpayer is an individual or a company.

If a transaction is classed as a trade, it will be liable to income tax or corporation tax. If a transaction is a property investment the resulting gain is typically charged to capital gains tax.

So you can see here that the question of whether you should be buying property through a limited company starts with your overall business plan strategy and whether you are trading or investing.

Lets move on…

 

Buying Property Through a Limited Company:


Whether or not you setup a private limited company for your property development business will depend on your circumstances and business plan strategy.

A private limited company must have at least one director, have a name and be registered with Companies House. Annual accounts and tax returns are required to be filled each year.

There is a lot more paperwork, regulations and costs associated with the setting up of and running a private limited company, which is the main downside.

The benefit..?

Firstly, your personal assets are protected and cannot be touched if all things go wrong.

Secondly, tax… there are a number of tax benefits by buying property through a limited company, especially when you are a property trader.

For property traders (which the majority of us developers are) it is the first and usually most efficient choice of how to trade and buying property through a limited company makes a lot of sense.

In very simple terms, tax in a private limited company (for property traders) is charged through corporation tax, which is usually 20%. If we were to be trading as a sole trader then the tax would be classed as income tax, and could be charged up to the top band rates of 40% or 45%, depending on the level of profit.

Clearly, as a property trader, buying property through a limited company makes sense…

 

Alternatives to a Limited Company:


The two main alternatives to buying property through a limited company is to trade as a sole trader or as a partnership.

As mentioned above, if we were classed as a property trader then our profits would be classed as income tax, which may not be favourable.

However, if we are a property investor, setting up as a sole trader or partnership may be the route to go.

Why..?

The gain on the transaction is taxed as capital gains tax, and this can often be lower when trading as a sole trader or partnership when compared to a private limited company.

The main benefits of trading as a sole trader or partnership is the fewer legal requirements and its the simplest form of trading.

However…

And this is a big however…

Trading as a sole trader or partnership means you (and your partner) are personally responsible for all debts incurred, which can have catostophic effects if things do not work out as they should do.

 

Final Thoughts:


So…

The question of whether you should be buying property through a limited company all comes down to your circumstances and your business plan strategy.

Are you a property trader or investor? Of course, you could be both and this then leads onto the final piece of advice…

and to finish…

The best advice is to always seek professional advice on this topic. You should, as a must, discuss your situation with an accountant to ensure you are taking the first route forward and do not miss anything critical…

Yes… it will cost a bit upfront…

But…

I guarantee it will save you more in the long run…

 

All the best – Mike (Your Property Pro)

 

P.s. Don’t forget to download my awesome business plan template. Its the same template I’ve used for my company and its an essential document for all developers…

 

Join the Newsletter to receive a FREE Business Plan Template Download in Word Format

By joining the Property Like a Pro newsletter, we will send you email newsletters containing property development blog posts, articles, hints, tips and occasional promotions about the Property Like a Pro Academy. We will never share your information with third parties and protect it in accordance with our privacy policy. You can unsubscribe at any time.

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