Setting up a property company can be a good way to be tax efficient and also protect your personal assets from risk. If you are thinking about setting up a property company it is important that you weigh up the pros and cons first. It is advisable that you speak to a solicitor for the legal side of things and an accountant for the tax side of things. I have recently made the decision to set up my own UK property company after 10+ experience renting out 2 properties in my own name as a sole trader. Today I am here to share how and why I did it. Please note that this blog is about setting up a property company in UK, and so if you are setting up a property company in a different country this may not be as relevant to you, and so seek further advice if this is the case.
Why should you consider Setting up a Property Company?
There are many reasons why you might consider operating as a LTD company rather than a sole trader. It could be for personal tax allowance reasons, it could be to offset interest only mortgage payments or it could be to protect your personal assets from any business risk.
Most landlords start out their property portfolio in their own name and most people who own companies still have properties in their own name. The issue comes when you have several properties with a decent income and this pushes you over the £50k tax bracket. In the UK, you are taxed 40% on any income over the top tax bracket. So as soon as you start earning over that, you may want to consider setting up a company.
Now, an additional concern is offsetting mortgage income against the rental income. In the UK, when I started out in property, landlords used to be able to offset interest only mortgages against their income on their Self Assessment. However, this has now been phased out. In a LTD company, you CAN still offset interest only mortgage payments agains the rental income. And so this is another benefit of operating as a Limited Company rather than a sole trader.
Finally, by setting up a LTD company you are creating a separate legal entity for your properties. This means that if you ever got ‘sued’ a civil case would be taken against the company rather than yourself as a person. This would also protect your personal assets (such as your home) from financial risk. For example, if your business went under, your home would not be at risk if the business was a LTD company and your residential home was in your name as a person (not the business).
Of course, these issues are always more complex than they seem at face value and the decision on whether to become a company will depend on your personal circumstances, so you should always take advice from your accountant and legal team. But these are some of the reasons why I made the decision to go LTD. Most landlords these days decide to do this when they get to 2 or 3 properties or more.
How do you set up a Property Company?
The stages of setting up a property company are:
- Take legal and financial advice to assess your circumstances
- Setup the company with Companies House
- Setup your LTD company bank account
- Secure startup funds
- Get a mortgage advisor and secure BTL agreement in principle
- Consider whether you need to be a member of any professional bodies
- Start purchasing property or managing property in the company name!
Take Legal and Financial Advice
As I mentioned, everyone’s circumstances are different and so although setting up a property company is a good idea for some landlords, it is not the best for everyone. Hire a solicitor and read through the Companies House website to make sure that you understand what is required by a company director and what the legal implications are. Also speak to your accountant (or even better a specialist property accountant) to make sure that it is the most tax efficient and best decision for you. When you know for sure that it is the right thing to do, then you are ready to GO!
Setup your LTD Company on Companies House
Setting up your LTD company on Companies House is quite straight forward. You need to come up with a company name. Generic or using your own name works well. I decided to go for ‘Liverpool Invest LTD’ because that’s where the bulk of my properties are going to be. This link here from Companies House talks you through how to set up a Limited company step by step.
You are usually setting up a company LTD by shares because a property business is going to generate profit. It won’t be a CIC (Community Interest Company) unless the way that they business is set up has a purpose to benefit the community or do charitable work rather than make profit.
Most people start out with one person as the Director without an additional secretary. This is only usually needed when and if your business grows. Most new MDs have just themselves as the main shareholder and set individual value of shares at £1. The cost to complete the application form with Companies House is just £12. You do NOT need to pay anyone anything additional to set up a company for you (unless you choose to). It is something that you can just do yourself online.
Once you have filled everything in and made the correct declarations you usually hear back from Companies House with a registered company number in a few days. They will also send you codes out to your address by post so that you can access your system to make tax declarations.
Setup your LTD Company Bank Account
When you have registered you company and got your LTD company Bank account you can then get a bank account in your company name so that you can keep your personal finances separate. Barclays and HSBC are good solid banks to choose, and if you already bank with one of them a Business Bank account application should be quite simple. However, most banks like this charge £5-£6 per month just to have the account open. If you want to avoid this you can go for an online bank that is app based such as TIDE or STARLING.
I decided to go for a Starling account. It was very easy to set up with the app. You can take a selfie and upload ID to verify your identity. If you are transferring funds they may ask for evidence of those funds in your name and evidence of where the money has come from. Once I had submitted everything that Starling needed my business bank account was opened within less than a week and my card followed by post a few days later.
Secure and transfer startup funds
Any new property company will need startup funds for marketing and investing in that first property company. You can secure funds through loans JV (Joint Ventures) and angel investors. I remortgaged one of the properties that I owned outright to be able to use to buy my first company. A good way to do this if you are putting your own money in is to ‘lend’ money to your own company as an ‘investors loan’. When you have startup funds, get them in your business bank when you are ready to offer and exchange/complete on a property.
Get a mortgage advisor and secure BTL agreement in principle
It’s a good idea to consider a BTL (Buy to Let) mortgage as an investor, Even though you may have funds to buy houses in cash, if you use a 75% LV (Loan to Value) mortgage this frees up your capital to invest elsewhere on another property. Choose a decent mortgage broker who can shop the market for you. Some company BTL mortgages cannot be accessed unless via a broker. It is normal to pay a fee say around £500 per mortgage that is set up. Your AIP (Agreement in Principle) may be asked for by Estate Agents when you start offering on your property. Remember that you mortgage will now be in your company name rather than your own if you are buying property as the company. However, they will still do credit checks on you as a person if you are the main Director.
Consider whether you need to be a member of any professional bodies
If you are going to be managing properties or buying properties to let then consider what professional bodies you may need to be a member of. You can join the National Landlords Association for just £75 a year. If you are managing rental properties for others you will need to be a member of a Redress Scheme such as the Property Redress Scheme. If you hold client monies you may need a separate client bank account to protect their funds.
Start purchasing property or managing property in the company name!
Once you are setup with all of the above you are ready to buy property through your limited company and take rental income through your LTD company bank account. Remember that any properties in your own name will still need to go through your own personal bank and be declared on your annual Tax Return (self assessment) unless you seek legal advice to set up a rent to rent contract.
If you found this article helpful you might also want to read this article on operating as a sole trader vs Limited Company.
Happy house hunting!