Limited Company vs Sole Trader for Property Buying: Which is Better?

Nowadays, owning or renting a property helps create a monthly income flow. This means your property income flow is an asset that will help you when you retire.

However, the rules are the same for every UK resident, whether a landlord is long-established or considering buying a property. The most important thing is to pay taxes as a landlord and implement the legal framework to rent out any property.

However, various landlords asked whether to buy a company as a sole trader or own it as a limited company.

So, we have explained some points thoroughly to help you determine whether it’s good to own a property via sole trader or as a limited company.

Is there any Difference Between Owning a Property as a limited company or a Sole Trader?

Using a limited company or a sole trader to buy a property can be confusing. You may get a question if there will be any difference between both. A limited company must pay corporation tax if it rents a property, house, or flat and receives rental income. However, if you want to take income for your business, you must pay yourself a salary, or you can take it out as a dividend, or both, being a tax-efficient person.

However, if you own a property as a sole trader, there is no difference between you and the business. So, you must submit a self-assessment tax return and pay the tax on the business’s income from renting the property. You have to pay the tax whether you get the income or not.

Special Purpose Vehicle Company: What does it mean?

According to HMRC and Companies House, a Special Purpose Vehicle company is similar to a limited company you build up.

Also, the term SPV is more likely to refer to the mortgage industry and a limited company used to buy and own properties. This assures lenders that the company is financially safe and focuses on property rather than other business activities. Also, avoid adding other activities as it can showcase your company as a financial risk.

Is there any advantage to Creating a Limited Company for My Property?

Well, there’s a benefit. Owning and renting out property via a Limited company may make you tax-efficient. However, it has other benefits and drawbacks too.

Use of Mortage Income to Lower Interest

If the Limited company owns a rental property, it is eligible to reduce its taxable income by deducting mortgage interest expenses. This tax relief, in turn, helps reduce the taxable amount the company can pay on the rental income it earns.
Sole traders can no longer deduct costs from their rental income like the mortgage interest.

Paying Yourself From Property Portfolio

Setting up your limited company gives you a much more flexible range of options for withdrawing money from your property business. Nowadays, company owners pay themselves salaries and dividends. Using this method to get income out of business means protecting state pension and access to other benefits while minimising your tax burden.

However, as a sole trader, you can pay tax on all business profits. The company owner has to pay taxes on all the income they take from the business.

Personal liability

Renting a property as a company eliminates all the usual advantages of limited liability. So, if you are in financial trouble, you don’t need to worry about selling your house, car, or other personal assets as a director. However, those could still be at risk if you are a sole trader.

BTL properties and capital gains tax

If an individual wants to sell an asset, they can claim capital gain tax on the profit or gain they make through special Capital Gain rules for properties. However, companies don’t pay CGT; they pay corporation tax on their profit.

If you want to be a verified property owner, developing more buy-to-let properties and owning them via a limited company can help you do so more quickly. Not paying capital gains tax can help you save more money to build up your property portfolio.

Critical Considerations for Owing a Property as a Limited Company

• Registering with the Company House
• Keep up-to-date company records
• Filing article of association
• Submitting company tax returns to pay corporation tax
• Report the changes like your name or address

Owing a property via a limited company involves much responsibility and requires extensive paperwork, so the completion process takes a lot of time. Also, your tax savings can affect you with extra mortgage costs, so seeking professional advice in this scenario is best.

Benefits of Renting out Property as a Sole Trader

Renting out a property as a company has several benefits, but there are also drawbacks. So, depending on your feelings about the downsides, you might decide to work as a sole trader.

For Example

Getting your buy-to-let mortgage as a sole trader can be more accessible. However, you still have to pay the fee and remain tax-efficient.
Changing your position to a limited company can cost you, and you must be prepared to be taxed on any money you pay yourself out of the company.

As a sole trader, you can retain the profits from your business and access your funds quickly and easily.