This article will delve into the pros and cons of setting up a company to buy property, an approach that involves buying property through a limited company, also known as a property investment company.
The goal is to help you make an informed decision about the best way to buy your property and grow your property portfolio.
Why Invest in Property Through a Company?
The decision to invest in property often stems from a desire for capital gain and the potential to generate regular income. Buying a property through a company can have certain advantages over purchasing property as an individual. Let’s explore these in detail.
As a property investor, you might find that buying through a company gives you access to a lower company tax rate, as compared to the higher income tax rates you might face as an individual. This can be particularly advantageous if you are a high-income earner.
Moreover, when you hold property in a company, there is a level of asset protection. If the company faces financial difficulty, your personal assets are usually protected because of the company’s limited liability structure.
How to Choose the Right Company Name?
Before you can buy property, you need to set up a limited company, which begins with choosing a unique company name.
The company name can influence the perception of your property investment company, making it an important aspect to consider. An accountant or business banker can provide professional advice about choosing suitable company titles.
You can also use random name generators to generate a unique and memorable name for your company that reflects the nature of your investment.
What are the Pros of Buying Property through a Company?
There are several pros when it comes to buying property through a company. For starters, a property investment company typically offers better asset protection and tax benefits.
Owning a property through a company allows you to distribute profits among shareholders, who pay tax based on their personal circumstances.
In addition, purchasing property through a company might allow for efficient management of geared properties. For example, a positively geared property, where the rent payments exceed the mortgage repayments, might result in a lower taxable income for the company compared to an individual.
What are the Cons of Buying Property through a Company?
While there are clear advantages to buying property through a company, there are also some drawbacks. One of the main cons is the potential loss of the Capital Gains Tax (CGT) discount that applies when a property is sold.
When selling a property as an individual, you may be eligible for a CGT discount if the asset has been held for more than 12 months, but this doesn’t apply to companies.
In addition, if the property is negatively geared, meaning the rental income is less than the expenses and mortgage repayments, the company cannot offset the losses against other types of income.
How does Stamp Duty affect Buying Property through a Company?
Stamp duty is a significant consideration when it comes to buying property. Stamp duty rates can vary greatly depending on your location and the value of the property.
Typically, the stamp duty rate is the same whether you buy as an individual or a company, but it’s important to seek professional advice as exceptions may apply.
Understanding the Implications of Distributing Profits
When a company makes a profit from the property investment, it can distribute the profits to shareholders in the form of dividends.
However, these dividends are subject to personal income tax. It’s essential to consider this when evaluating the tax implications of buying property through a company.
Capital Gains and Buying Property in a Company
When you buy an investment property through a company, it’s crucial to understand the implications of capital gain. If you sell the property and make a profit, the company will need to pay capital gains tax.
Unlike individuals, companies are not eligible for the CGT discount, which can impact the net profits from selling a property.
Why Seek Professional Advice?
Setting up a company to buy property involves many considerations, including tax implications, property market conditions, and the investor’s financial situation.
It’s highly recommended that anyone considering this investment strategy seek professional advice from an accountant or financial advisor who understands property investing.
Are You Ready to Buy Your Property Through a Company?
Choosing to buy property through a company can offer numerous benefits, but it’s not for everyone. It’s essential to consider all factors, including your long-term investment goals and personal circumstances.
When you’re ready, purchasing a property through a company can be an exciting step towards building a profitable property portfolio.
Setting up a Company to Buy Property FAQ
How can I buy property through a company?
You can buy property through a company by setting up a limited company or purchasing a property investment company. By doing so, the property will be owned by the company, providing limited liability and potential tax benefits.
What are the pros and cons of buying property through a company?
When it comes to buying property through a company, there are several advantages and disadvantages to consider. The main benefit is asset protection as the property is owned by the company, shielding personal assets from potential risks.
Additionally, companies can enjoy certain tax benefits and have greater flexibility in managing and distributing income. However, it’s important to evaluate the associated costs, such as company registration fees and ongoing compliance requirements.
Consulting with a professional advice such as an accountant is recommended to assess the suitability based on your specific situation.
Can I still obtain a mortgage when buying property through a company?
Yes, it is possible to obtain a mortgage when buying property through a company. However, it’s important to note that the lending criteria for mortgages may vary for company ownership.
You may need to provide additional documentation and meet specific requirements from the lender. Consulting with a mortgage advisor who is experienced in company-owned properties is recommended to ensure a smooth application process.
What are the tax implications of buying property through a company?
Buying property through a company can have different tax implications compared to purchasing property as an individual. Companies are subject to company tax based on their taxable income, while individuals are subject to income tax on their personal income.
It is important to consider factors such as capital gains tax (CGT) and negative gearing when assessing the overall tax implications of purchasing property through a company.
Consulting with an accountant or tax advisor would provide a better understanding of the specific tax regulations and potential tax benefits.
How can I protect my personal assets when investing in property?
To protect personal assets when investing in property, setting up a company can be beneficial. By purchasing property through a limited liability company, your personal assets are separate from those of the company.
This means that in the event of any liabilities or legal issues related to the property, your personal assets will not be at risk.
