Project Description

Should you buy UK property through a company as an expat?

Being an expat often means that your annual income is greater than you’d earn in the UK. It’s also likely that you’ll own more than one property, using your extra cash to fund property purchases back home.

But which is the best ownership route to acquire UK property as an expat, and what key issues do you need to contemplate before purchasing such property assets?

Recent changes affect the nature of ownership decisions

The two primary choices are to either keep the property ownership in your name, or to set up a limited liability company. Up until about 5 years ago, the latter was the choice of the majority. This was partly as tax advantages were not material, and partly as mortgages for companies funding property purchases were much less competitive.

But then government, via an emergency budget in 2015, announced legislative changes. These meant that, up until April 2017, individuals could deduct mortgage interest, plus all other relevant costs from income before determining taxable profits.

However, from April 2020 when all new measures took effect, if a property is owned by an individual, mortgage interest costs can no longer be deducted from taxable profits. On the other hand, if the property is owned as a company, the old rules continues and nothing has changed.

The result? Up to around 80% of new mortgage applications for buy-to-let or investment properties are now from limited companies.

Setting up a limited company may not be the solution for everyone, but it’s certainly something any expat needs to consider. Much of the decision making should be based on your own personal circumstances and, needless to say, appropriate professional advice taken. However, getting the ownership structure right may make a huge difference to the amount of tax you pay over your lifetime and beyond.

At the end of the day, the decision is all going to be centred around mitigating taxes, but there are some other related issues for you to consider to get you started thinking:

1: Are you a trader or investor?

Buying a property to make value-added improvements before selling on for a profit, means you’re a trader

Buy through a limited company to save on tax by paying corporation tax on your profits:  19% in 2020.

Buying as an individual, your profit on resale of the property(ies) will be taxed as income at much higher rates.

Buying this way may also be beneficial if you have children and plan for them to inherit your property. When the property is sold, the proceeds will be distributed between the shareholders but inheritance tax will be payable, albeit at reduced rates.

Buying a property for the rental income and longer-term capital appreciation

The tax rate is up to 45% of the rental income if you are a private individual and a higher rate taxpayer paying tax in the 40-45% range.

In short: many expat investors have historically operated as sole traders, but may now get more benefits from using a limited company. Clearly, there are income tax advantages, a mortgage interest treatment advantage and, possibly, Inheritance Tax advantages so buying through a limited company seems to make more sense for many expats.

2: Conversely…

There are several issues which might affect your decision to buy through a company:

  • there are not quite as many mortgage options and interest rates and fees may be higher as lending to a limited liability company is perceived as carrying higher risks;
  • you will still need to give a personal guarantee and your own finances will be scrutinised, so, in many ways it’s still a personal mortgage but with tax benefits;
  • if you plan to take dividends out of the company, first you will have to have paid corporation tax, with dividend tax due on the remainder;
  • there will be higher accountancy and legal costs for the ongoing operation of the company, and more paperwork, of course. Accounts and tax calculations will need to be calculations submitted to HMRC;
  • stamp duty is also payable on any “repurchase” of the property if you need to sell the property in your name to your company. In addition, anyone buying a second home is subject to a 3% surcharge on the rate of stamp duty due.

So how do you make a decision?

Clearly, there are a number of different factors to consider before you can make a final decision about buying through a company. Speak to your legal and tax advisors in more detail about the pros and cons before deciding which ownership route is right for you.

They will ask you more in-depth questions about your objective and finances and advise on:

  • effective planning, so that taxable gains can be delayed until you retire and your primary income falls;
  • whether to leave the rental income accruing in the company;
  • the most tax effective way for your exit strategy

There are, in fact, other options if you do not want to buy via a limited company nor keep the ownership of the asset in your name. A lower-earning spouse could put the property into their name, incurring income tax at only 20%, for example.

Generally speaking, expats tend to retain existing properties in personal ownership, and buy any future properties via a company if this meets their longer-term objectives.

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