Can a Small Business Buy a House?

Buying a house will likely be the biggest purchase you will make in your lifetime. It can be extremely hard to find the right place and get the finance lined up. 

Sometimes it doesn’t quite go to plan, that’s what makes buying a house so stressful, so many things outside your control, you wish there was something that could help but then you have a brainwave about your own small business buying the house instead of you.

Can a small business buy a house? Yes, you can buy a house through your small business. The accounting and tax treatment of the transaction is driven by how the house is purchased and how the business will use the house or earn income from it. However, many variables make this a complex area.

Throughout this guide, we will walk you through the practical, financial and tax considerations of buying a house as a director through a small business. You can then make an informed decision about whether it is worth buying the house via the company or not.

Can a business buy a residential property?

Yes, a house can be owned by a company, therefore a business can buy a residential property. The purpose of a small business owning the house will affect how it should be accounted for in your accounting records and whether in fact, it would make sense to hold the house in its own limited company.

If you purchase a house through your small business, it will be an asset of the company, so not be treated as an expense in the profit and loss account. Instead, it will be accounted for in the balance sheet of the business showing the financial position of the business.

How that asset is depreciated will depend on the split of the purchase price being land, buildings plant and equipment.

Associated costs of running the house can be treated as a company expense:

• Mortgage interest.
• Council tax.
• Water and sewerage charges.
• Heating, lighting, and cleaning.
• Repair, maintenance, and decoration.
• Furniture for daily use.
• Staff for the upkeep of accommodation, for example, gardeners and cleaners.

Can a company buy a house for a director?

Yes, you can live in a property owned by your limited company. There are many situations where this would make sense for example someone who has been through a divorce and requires somewhere to live and can’t get a mortgage, but their small business has funds and could get a loan.

Not only can this provide that person with a footing to get them back on their feet, but it can be a cost-effective way to do it. Employer-owned property rather than rented property uses Gross Rating Value for the calculations of the benefit in kind. These figures are normally low meaning a much lower benefit.

As an employer providing accommodation for your employees, you have certain tax, National Insurance, and reporting obligations.

What’s included

As well as the costs of the accommodation itself, this includes:

• Council Tax.
• Water and sewerage charges.
• Heating, lighting, and cleaning.
• Repair, maintenance, and decoration.
• Furniture for daily use.
• Staff for upkeep of accommodation, for example gardeners and cleaners.

There are two different scenarios in this case which we have gone into further detail below, being whether you live in the house rent-free or rent it from the company.

Each scenario will present different tax consequences and you will need to consider which works best for your personal and business circumstances.

Can I live in a property owned by my limited company?

The provision of living accommodation for an employee and/or members of the employee’s family or household gives rise to a taxable benefit unless the accommodation is exempt.

Exempt accommodation

You do not have to report or pay anything to HM Revenue and Customs (HMRC) on the cost of certain types of accommodation.

Accommodation at the place of work is exempt if:

• Your employees cannot do their work properly without it, for example, agricultural workers living on farms.
• An employer is usually expected to provide accommodation for people doing that type of work (for example a manager living above a pub, or a vicar looking after a parish).

If you provide the accommodation to company directors of the small business, they must be either full-time or work for a non-profit or charity organisation and hold less than 5% of the shares.

If the accommodation you provide is exempt, you do not have to report Council Tax, water, and sewerage charges to HMRC, or pay National Insurance and tax.

If the accommodation provided is not exempt, you must report it to HMRC, via a form P11D and pay Class 1A National Insurance on the value of the benefit.

Working out the value of the benefit in kind can be tricky. Use this guide on how to work out the value of benefit in kind on living accommodation.

Use HMRC’s P11D working sheet if you need help working out the cash equivalent of accommodation benefits.

The employer will pay Class 1A National Insurance contributions the employee must pay tax on the value of the benefit in kind. After a P11D has been submitted to HMRC they will adjust the employee’s personal tax code to claim the money back through PAYE.

Can my company buy a house and rent it to me?

As we have discovered above it is perfectly legitimate for a company to buy a house for an employee to live in.

If you were to rent it from the company the situation is slightly different than shown above. 

Any rent paid by the employee is deducted when calculating the benefit in kind. If you are paying a market-rate rental, then it is likely that this will be in excess of the benefit in kind value and therefore no benefit will arise and no tax to pay.

Example

• Buying price: £175,000
• Gross rating value: £1,000
• Employee rent: £1,250
• Interest rate: 4%

The standard reportable value is £0, because the rent is more than the annual rating value.

• Additional charge is £3,750:
• £175,000 – £75,000 = £100,000
• £100,000 x 4% = £4,000
• £4,000 – £250 (left over rent from standard value) = £3,750

Therefore:

• Total value to report is £3,750:
• Standard value (£0) + additional charge (£3,750)

Can my limited company buy my house?

Yes, your limited company can buy your house. This would be considered a sale and a purchase transaction. The process is subject to the same additional costs and fees as any other property purchase which include:

• Stamp duty land tax.
• Capital gains tax.
• Legal fees.
• Early redemption charges (if applicable).

These initial costs might put you off, but the longer-term gains might just make this a possible option. This is where you would need to seek professional advice from your accountant to run scenarios and see what the best option for your personal circumstances would be.

You cannot sell the property to the business at a discounted rate. If you do there will be tax consequences. The property must be sold at open market rate value. Provided you have enough equity in the property when selling it you could then lend that money to the business as a director’s loan so it can use the cash as the deposit. This may negate the need to raise a deposit from other sources.

Buy property through a limited company or personally?

You may have considered buying property through your limited company if you are a business owner. In recent years, there has been a major shift toward property buying through limited companies. This has primarily been driven by changes to the mortgage tax relief rules. 

These were introduced by former chancellor of the exchequer George Osborne back in 2015. Aimed at cutting back on the number of private landlords in the UK they were introduced on a sliding scale. 

It got to the point that, as of April 2020, private landlords could no longer deduct any mortgage expenses from their rental income to reduce their tax bill. This has resulted in landlords seeing a considerable reduction in their after-tax profits, for some landlords by as much as 40 per cent.

Limited companies can treat mortgage interest as a cost and corporation tax and dividend tax rates are much less than the income tax rate for higher-rate taxpayers. Even today, many landlords consider setting up a limited company rather than paying tax as an individual property investor.

In most cases, buying property through a limited company makes sense for higher-rate taxpayers. It provides full tax relief on mortgage interest and access to reduced tax rates and increased flexibility. Additionally, it establishes a solid professional foundation for your property business, which can be beneficial when it comes to convincing investors and lenders. 

However, each circumstance is unique, and it’s always worthwhile to seek guidance as the UK government continues to make changes that make the decision slightly more difficult each year.

Advantage of buying property under a company name

Advantages of buying property under company name (limited):

• Profits are taxed at the corporation tax rate of 19% (2022) versus income tax rates of up to 45% (for private landlords, profits are taxed via income alongside your other income).
• Flexibility around when to extract income from the business
• Retain more profit to reinvest in the business.
• Private landlords can no longer deduct their mortgage expenses from rental income to reduce their tax. Instead, they receive a tax credit based on 20% of their mortgage interest payments (higher or additional rate taxpayers will not get all their tax back on mortgage interest).
• Mortgage interest is treated as a business expense for limited companies before paying corporation tax.
• Potential IHT and CGT benefits (if you plan on passing the portfolio to family members, make them shareholders in the limited company to avoid large amounts of inheritance tax).
• Receive dividends rather than paying income tax.
• No impact on personal credit score if experiencing problems getting rent from tenants.

FAQs on small businesses buying houses

Can I buy a house to live in through my limited company?

Yes, you can live in a house bought through a limited company. The tax treatment of that will vary depending on whether you live in the house rent-free or pay rent to the company.

Rent paid to the company will be treated as taxable income for the company.

If you live rent-free in the house, then you are receiving a benefit in kind from the company. The business will have to submit a P11D to HMRC informing them of the benefit so you can pay the appropriate amount of tax. 

The company will also pay employers NI contributions on the deemed value of the benefit in kind.

It is important to run through these calculations and scenarios before entering into an agreement so you can work out which one suits your business and personal circumstances best.

Can I use company profits to buy a property?

As a director of a limited company, you have certain duties to perform, a selection provided here as a reminder:

• to promote the success of the company for the benefit of its members
• to exercise independent judgement
• to exercise reasonable care, skill, and diligence
• to avoid conflicts of interest
• to declare an interest in a proposed transaction or arrangement

You may want to check out our guide on what your responsibilities are as a Director of a limited company.

If the purchase of property from company profits does not hinder you from performing these duties, then you could use company profits to buy property. You would need to consider whether this is a wise move depending on the type of business you operate and what benefits the business will derive from holding property.

For example, if you can see a need for cash in the business in the future it does not make sense to tie up large amounts of capital in an asset that is not liquid. It could take months and even years potentially to sell a property and get the cash back into the business account. What impact would that have on your company?

What are the benefits of buying a property through a limited company?

If you are buying property through a limited company with a view to running it as a buy-to-let here are the benefits of buying a property through a limited company.

In recent years, there has been a substantial move towards buying an investment property through companies that are listed as limited. This has primarily been driven by changes to the mortgage tax relief rules.

Benefits of buying a property through a limited company:

• Profits are taxed at the corporation tax rate of 19% (2022) versus income tax rates of up to 45% (for private landlords, profits are taxed via income alongside your other income).
• Retain more profit to reinvest in the business.
• Private landlords can no longer deduct their mortgage expenses from rental income to reduce their tax. Instead, they receive a tax credit based on 20% of their mortgage interest payments (higher or additional rate taxpayers will not get all their tax back on mortgage interest).
• Mortgage interest is treated as a business expense for limited companies before paying corporation tax.
• Potential IHT and CGT benefits (if you plan on passing the portfolio to family members, make them shareholders in the limited company to avoid large amounts of inheritance tax).
• Receive dividends rather than paying income tax
• No impact on personal credit score if experiencing problems getting rent from tenants.

Is it better to buy a property through a limited company?

Above we have considered the benefits of buying a property through a limited company. To work out whether it is better to buy a property through a limited company we now need to look at the disadvantages of buying property through a limited company.

Only when comparing the two can you work out if it is better to buy a property through a limited company. 

This will, of course, be different for each person’s circumstances so we cannot give you a definitive answer and the answer may even be different for you when buying property through a limited company as things change in your personal business situation.

Disadvantages of buying a property through a limited company:

• Additional operational costs (legal fees are often higher).
• Accountant costs.
• Mortgages through a limited company normally attract higher interest costs.
• Finding a lender can be tricky as there are fewer products on the market for buy-to-let properties through a limited company.
• Some lenders will want the directors to enter into a personal guarantee.
• If selling your property to a new company this would trigger Capital Gains Tax, stamp duty would also be payable.

Conclusion

The decision of whether to buy a house through a small business is a difficult one. There are several variables to consider such as how to pay for it, what capital allowances can be claimed, what the overall cost will be, whether you should pay rent etc. It really is a most complex area.

If you are buying a house through a small business for directors or employees to use, you may also wish to factor in the employee’s individual circumstances as that could also change the decision-making process. 

Seek professional advice where possible. It can be easy to make the wrong decision which could cost you time and money.  Buying property is not something you should into lightly as the value can decrease and it can take a long time to turn the property back into cash.