The Different Options for Buying a Property (and the Tax Implications)

As an existing or prospective landlord, there are three main options available when it comes to buying property.

You can either:

Purchase it as an individual
Purchase it through a partnership or joint ownership
Purchase it through a company

Each option has its own advantages and disadvantages, especially when considering the changes to residential property taxation in recent years. The right option for you will depend on your personal circumstances and objectives, so it’s critical to understand how they differ and what that means for your taxes before you buy.

Personal Property Ownership

Personal ownership is, by far, the simplest option available to landlords.

As long as you have the budget (or, at least, the deposit for a buy-to-let mortgage), it’s a case of finding a suitable property and following the normal purchase process.

It comes with several distinct advantages too:

Obtaining a mortgage is easier and has lower interest rates than company ownership. This is due to the liability of personal ownership, meaning lenders are more likely to get their money back should something go wrong.
The money goes directly to your bank account, so you can access it quicker.
There is less admin and fewer compliance requirements than a company, which must register with Companies House, keep records and submit annual accounts.

But let’s take a look at the tax implications of personal ownership:

Capital gains tax is paid if the property is sold for a profit – 18% for those with a total taxable income lower than the basic rate threshold (currently, £50,270), or 28% for those with a total taxable income above the threshold.
Income tax is paid at the individual’s income tax band – 20%, 40% or 45%. However, tax relief and fixed-rate deductions are available.
Inheritance tax may be due, as all personally-owned properties will form part of the deceased’s estate.
VAT is not applicable on residential properties.

However, one key point for personal ownership is that mortgage interest cannot be claimed as an expense against profits. This means landlords can easily be pushed well above the basic rate threshold of £50,270 and, therefore, will incur much higher income tax levels.

So, with that in mind, who does personal ownership suit?

Those who are planning to purchase and sell the property for a profit in a short period of time as they’ll avoid double taxation.
Those with a total taxable income, including mortgage interest, that falls under the basic rate threshold may find they take home more via personal ownership than through a company.

Owning Property in Partnerships

A second way of purchasing property is by splitting it with others. Sometimes, this can be determined as a partnership, although HMRC has quite strict rules over what does (and does not) constitute a genuine partnership. In their own words, it a partnership must display a level of “organisation similar to that required in an ordinary commercial business”.

The advantage of a partnership is that the profits and losses from property owned by the partnership can be assigned between the partners at any ratio they agree on.

The disadvantage is that a standard partnership is unincorporated, and each partner has unlimited personal liability for the debts and obligations of the partnership. Naturally, this is a risk.

To get around it, partners may register as a limited liability partnership (LLP). This is treated more like a formal company, with registration at Companies House required. As the name suggests, a major benefit is the limited liability – partners can agree on a structure whereby their liabilities are limited to the amount they originally put into the business.

The tax implications of any partnership are the same, and they’re relatively simple as partnerships are ‘transparent’ for tax purposes:

Capital gains tax is paid by each partner on their share of the profits from a sale – 18% for those with a total taxable income lower than the basic rate threshold (currently, £50,270), or 28% for those with a total taxable income above the threshold.
Income tax is paid by each partner on their share of the profits. The rate depends on their income tax band – 20%, 40% or 45%.
Inheritance tax may be due, as each partner’s share of a partnership will be included in their estate.
VAT is not applicable on residential properties.

It’s worth noting an LLP can include corporate partners. Such partners are liable to pay corporation tax (19%) on their share of the profits from either rental income or a sale.

There are significant planning opportunities when structuring property investments held jointly or through a partnership which can result in income tax and inheritance tax benefits. For example, in a partnership containing both basic and higher rate earners, the higher rate earners may take a smaller position to avoid over-exposure to income tax.

So, with all that in mind, who is partnership ownership for?

Those who want to leverage the flexibility in share distribution for tax efficiencies, such as couples, families or business partners.
Those who want to reduce their personal liability by incorporating an LLP.

Company Ownership of Property

Company ownership of property is the most complex and time-consuming for landlords but potentially the most tax efficient for those looking at long-term investments and growing their portfolios

Landlords must set up the company, register directors, file company accounts each tax year, and maintain a long list of company records.

But, by purchasing through a company, it is the company that owns the asset. And this structure has clear advantages:

Directors and shareholders are not liable for the assets owned by a company, meaning you can only lose what you invested should you encounter financial difficulties.
Companies can use business expenses to offset profits, which, critically, includes mortgage interest payments.
Companies are tax-efficient, with corporation tax lower than all forms of income tax, making it easier to retain and build profits in the business.
A company will survive an owner’s death, plus directors and shareholders can change at any point.

Now, let’s look at the tax implications of company ownership:

Annual tax on enveloped dwellings (ATED) is an annual fee paid by companies owning residential properties worth more than £500,000. It starts from £3,800, but increases based on the property’s value. This only applies if the property is used by connected persons.
Corporation tax is paid on all profits – 19%. This means company-owned properties are exempt from capital gains tax following a sale, and only corporation tax is paid. From the tax year 2023/24, corporation tax may increase for companies with profits over £50,000.
Capital gains tax is not applicable on the sale of a property owned by a company, instead corporation tax is due (see above).
Income tax is only paid by individuals when they extract funds from the company through a salary or dividends.
Salaries are subject to the individual’s income tax band – 20%, 40% or 45%.
Dividends are taxable for anything over a tax-free allowance of £2,000, based on the individual’s income tax band rates: basic rate payers are taxed 8.75%, higher rate payers are taxed 33.75%, and additional rate payers are taxed 39.35%.
Inheritance tax may be due on the value of the shares owned by the deceased in a company if the deceased’s estate exceeds the IHT threshold.
VAT is not applicable on residential properties.

Remember that landlords can often be pushed into higher-rate income bands by their mortgage interest through personal ownership. This means all income above the threshold is taxed at least 40%.

Meanwhile, companies only pay 19% corporation tax. And, they can reduce their tax bill by claiming mortgage interest as an expense.

Plus, company ownership offers the chance for efficient, long-term inheritance tax planning, such as structuring the company as a family investment company where you can pass wealth to the next generation but still maintain control and income.

Overall, company ownership of property can result in a huge tax-saving compared to personal ownership.

So, who does company ownership best suit?

Those who are planning to hold the property for the medium-to-long term.
Those who don’t need the income immediately and are happy to leave money in the company – undrawn profits grow quicker due to lower tax rates, and company owners can plan to extract profits tax-efficiently.
Those who wish to buy more properties and develop a large portfolio.
Those who wish to attract third-party investment – investors can come on board as shareholders, boost your capital and allow you to grow quicker.

Summary – The Methods of Purchasing Investment Properties

Landlords have three main options for buying a property: personal ownership, partnerships, or company ownership.

Personal ownership could suit those not looking to build a large portfolio of investment properties and are basic rate taxpayers.

Partnerships are useful for groups who wish to combine their resources and expertise, limit their risk, and work the share distribution in their favour.

But, largely speaking, company ownership is one of the smartest methods of purchasing rental properties for long-term landlords, given the relief available on mortgage interest. It’s no surprise to see a record number of buyers attracted to this structure. In addition to the ongoing tax efficiencies, the key benefit is the estate planning and control a company brings that will help ensure wealth is preserved for the next generation.

So, more than anything, it’s critical to think carefully about your personal circumstances and long-term objectives before deciding on how best to proceed. Hopefully, this article helps your decision-making process – good luck!

This article was written by Amal Shah, Partner in the Tax Advisory team at Gerald Edelman.