Exploring the Pros and Cons: Residential Property Purchase through Limited Company vs Sole Trader

The decision to invest in residential property is a significant one, and it comes with various considerations. Among these is the choice of the legal structure through which to make the purchase – whether as a sole trader or through a limited company. Each option has its own set of advantages and disadvantages, and understanding them is crucial for making an informed decision.

Pros: Operating as a sole trader is straightforward and involves fewer administrative requirements. Decisions can be made quickly, allowing for greater flexibility in property management.

Cons: Sole traders may have limited access to certain tax advantages and financial leverage compared to limited companies.

Pros: Sole traders can benefit from certain tax allowances and reliefs, such as the Capital Gains Tax (CGT) allowance. Additionally, any losses incurred can be offset against other income.

Cons: Tax rates for sole traders may be higher compared to limited companies, and there might be fewer opportunities for tax planning and optimization.

Pros: As a sole trader, there is direct control over the property and its management. Any profits belong solely to the individual.

Cons: The individual is personally liable for debts and obligations related to the property, potentially putting personal assets at risk.

Pros: Sole traders may find it easier to secure financing for property purchases as lenders may perceive them as lower risk due to personal liability.

Cons: Limited access to certain financial products and higher interest rates compared to limited companies might be a drawback.

Pros: Limited companies provide a layer of protection for personal assets as the company is a separate legal entity. Personal liability is limited to the amount invested in the company.

Cons: Setting up and maintaining a limited company involves more administrative work and may incur additional costs.

Pros: Limited companies often benefit from lower corporate tax rates, and there are more opportunities for tax planning, including options for director remuneration and dividend payments.

Cons: Changes in tax regulations can impact the benefits associated with limited companies, and compliance requirements may be more complex.

Pros: Limited companies may have easier access to various funding options, including mortgages with more favorable terms.

Cons: Lenders may require a personal guarantee or charge against personal assets, mitigating some of the limited liability advantages.

Pros: Limited companies offer more straightforward options for succession planning, making it easier to pass on property ownership to heirs or sell the company.

Cons: Changes in company ownership may trigger tax implications, and inheritance tax considerations must be taken into account.

Taxable Gains on the disposal of Residential properties are taxed at either 18% ( basic rate taxpayer ) or 28 % ( Higher rate tax payer ).

Annual Exemption Allowance. 2023/2024 – £6000

Small profits rate for companies with profits under £50,000 – 19%

Main profits rate for companies with profits over £50,000 – 25%

From 1 April 2023, there is no longer a single Corporation Tax rate for non-ring fence profits.

At the Spring Budget 2021, the government announced that the Corporation Tax main rate for non-ring fence profits would increase to 25% for profits above £250,000.

A small profits rate of 19% was also announced for companies with profits of £50,000 or less.

Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by a marginal relief. This provides a gradual increase in the effective Corporation Tax rate.

The choice between purchasing a residential property as a sole trader or through a limited company is complex and depends on individual circumstances, financial goals, and risk tolerance. Sole traders benefit from simplicity and personal control, while limited companies offer advantages in terms of limited liability, tax efficiency, and access to funding. It is crucial to seek professional advice and carefully weigh the pros and cons before making a decision that aligns with both short-term and long-term objectives.