So, you’re thinking about investing in property? Smart move. But here’s an even smarter move – setting up a property holding company to make the most of your investment.
If you already have a limited company, using it to help fund your property portfolio can be a game-changer. Why? Because under current tax laws, profits from your trading business can be transferred to the property company without incurring extra tax costs.
Translation: more money to invest in property, and less going to the taxman. Sounds good, right?
Of course, there’s always a trade-off – you can either:
a) Take money out of the business for yourself (as income or pension contributions), or
b) Leave it in the business to fund property investments.
It’s all about strategy and balance. Here’s what you need to know.
How do property holding companies work?
When it comes to buying property as a business, the good news is that property companies can borrow and mortgage just like individuals.
Most lenders will have their own affordability rules and how much you can borrow, but a common requirement is that rental income must be at least 1.5 times the mortgage payment. This means if your mortgage costs £1,000 a month, your rental income needs to be at least £1,500.
The key takeaway here? Know your numbers. A good mortgage broker will help you navigate the best deals, but having a clear idea of your rental income and borrowing power will put you in a stronger position.
How many properties should you aim for?
Now, let’s talk scale. Because whether you’re buying one property or thirty, the cost/benefits of operating a limited company property portfolio will change and will need to be considered.
For example:
- One or two properties? – You’ll need to weigh up whether the costs of running a limited company make sense. Sometimes, it’s just not worth the extra admin if you’re keeping things small.
- Around a dozen properties? – Now we’re talking solid retirement income.
- Thirty or more properties? – Welcome to financial freedom. At this scale, your property portfolio could be providing a great lifestyle, not just a comfortable one.
To help aid in your decision making, we recommend making a 5-year or 10-year plan. What kind of properties will you invest in? Which locations make the most sense? What types of tenants will you rent to? A bit of planning now makes all the difference in the long run, so focus on how you will get to where you want to be.
How to compare properties?
When deciding which property to invest in, one of the best ways to compare value is by looking at the rental yield.
The formula is simple:
>> Rental yield = (Annual rent ÷ Current market value) × 100
For example, if a property is worth £200,000 and generates £12,000 in annual rent, the rental yield is:
(£12,000 ÷ £200,000) × 100 = 6% yield
A higher yield generally means a better return on investment, but it’s also worth considering other factors like location, property type, and tenant demand.
And if you already own rental properties, this calculation can help you work out whether it’s time for a rent review and which properties need a rent increase.
Standalone companies vs holding groups
When setting up a property holding company, you’ve got two main options:
- Two separate limited companies – Your trading business and your property business stay separate, and you use intercompany loans to move funds. The downside? You’ll need a clear plan for how that loan gets repaid.
- A group structure – This means setting up a holding company and a subsidiary company. One company can pay dividends to the other, making it much easier to move profits around.
If you go down the group structure route, you’ll need tax clearance to avoid unexpected tax charges. Plus, it’s worth thinking long-term about the capital gains tax (CGT) and inheritance tax implications.
Thinking about setting up a property holding company?
Setting up a property holding coSo speak to the experts! We can help you:
✔ Set up your company structure correctly
✔ Plan your property investment strategy
✔ Ensure you’re tax-efficient from day one
Drop us an email at [email protected] and book a free initial consultation with us today.
Because let’s face it – if you’re going to invest, you might as well do it properly.mpany can be a fantastic way to invest in property while maximising tax efficiency – but only if you do it the right way.
