There are several ways to go about buying a property, as the real estate market is expanding and adapting to different budgets, allowing you to choose the option that best suits your situation.
To buy a property in a company name is possible, but there are several conditions that apply at the time of making a transaction like this. It is a procedure that for many is one of the best options, as it has certain tax advantages compared to purchases made by individuals.
Using a Limited Company to buy property offers several important advantages and considerations such as limited liability protection for the owners, potential tax benefits and the ability to separate personal assets from business assets. In addition, the structure of a LTD company can provide flexibility in the management and transfer of ownership. However, an LTD company buying a property has associated taxes, such as Value Added Tax (VAT) and Stamp Duty that you should not forget to check before buying a property with an LTD.
What are the legal implications of buying a property through a company?
Buying a property through a company is completely legal in Spain, even for non-residents his approach has become so popular that, according to data from the Official Association of Registrars, between 2010 and 2017, 13.7% of home purchase transactions in Spain were conducted through companies.
When you decide about buying a property in business name, the transactions are regulated by article 5 of the Corporate Tax Law, which focuses on regulating all buying and selling activities that are related to the management of a patrimony. Furthermore, the law offers several advantages for buying a property through a limited company (also called LLC) and which can provide better benefits.
Buying a property through LLC: what taxes does the company have to pay?
Buying property through an LLC (Limited Liability Company) is a strategy commonly used by real estate investors. The LLC can help separate personal assets from business assets, which provides an additional layer of legal protection. In addition, this structure can simplify management and facilitate the transfer of ownership. However, it is critical to understand the specific legal and tax implications of buying a house with an LLC before making a decision.
When buying a house through a limited company you must comply with certain commitments and taxes that become obligatory and that you must always bear in mind. The taxes payable when purchasing a home under an LLC are:
- Value Added Tax (VAT)
- Stamp Duty
- Real Estate Tax
- Income Tax for Non-Residents
- Wealth Tax
When a company buys a property, the Stamp Duty has to be considered. It is a tax that applies when purchasing a home under an LLC or through an individual buyer and affects your home depending on its value and whether it is your primary or secondary residence. When a company buys a property, the stamp duty is a part of the costs associated with buying a property in a company name or private individual in the UK.
Advantages of buying property through a limited company
It has already been confirmed that it is possible to buy a house or a flat in the name of a company, but what are the advantages of using a LTD company (also called Limited Company) to buy property? If you are thinking of buying a house through a limited company you should consider the advantages and disadvantages before starting the process. They are going to be discussed and developed below.
Tax benefits for high net worth individuals
One of the main advantages of an LTD company buying a property is that properties managed through property companies are taxed through corporate income tax, at a general rate of 25%. When the owner is an individual, the taxes related to this property are paid through the IRPF, applying the corresponding tax rate according to the level of income, which can range from 19% to 45%.
However, for the purposes of the Tax Agency, the sale of the property only generates income in the IRPF when it generates a capital gain. This difference means that buying a property with a company can represent a significant saving for high net worth individuals. Therefore, purchasing a home under an LLC brings with it a wide range of tax benefits.
Deduction of Value Added Tax (VAT)
The deductible VAT for the purchase of a house by a company, also known as Value Added Tax, also applies when buying a house in the name of a company when it is a newly built house. As for the percentage applied, it is 10% of the total value, although it can be reduced to 4% in the case of social housing of special regime or public promotion.
From this point of view, buying a house with an LLC can be an advantage in some cases, in which VAT is considered a deductible expense, which is not applicable when the purchase is made by an individual. Therefore, the Deduction of Value Added Tax is another advantage of using an LTD company to buy property.
Tax relief for rental properties
This is one of the best news for those who decide to buy a property in the name of a company in order to rent it out. From 2019, the law has established a 100% rebate on the tax for renting a property. This applies as long as these properties are not destined to a business activity and the annual rent is less than 15,000 euros, being one of the great advantages of buying a property in the name of a company.
Greater legal certainty
Buying a property through a company also provides greater legal certainty, which is why it is often preferable in inheritance situations, as it helps to prevent conflicts.
In addition, by buying a property through a limited company, the rules and procedures for the management of the property, including the distribution of profits, decision-making and the resolution of conflicts between the partners, are clearly established. This can help prevent misunderstandings and future disputes over the use and management of the property, contributing to greater legal certainty and protecting the interests of all involved.
Inconveniences of using a company to buy property
When using a limited company to buy property you may find certain advantages, but you should also take into account those aspects that are not so beneficial. In addition to the many advantages of using an LTD to purchase a property, there are also disadvantages to consider.
Lack of significant tax advantages for medium-sized assets
If you are of average wealth, buying a property through a limited company may not be the best option, as this may involve higher costs related to the incorporation of the company, as well as being subject to Corporation Tax at a flat rate of 25%.
Higher taxation for first or second homes
According to property management experts, buying a house through a limited company is not an advantageous option either when it comes to buying a primary residence or a second home.
Although there are common taxes for the purchase of a property in both cases, such as VAT or Transfer Tax, for individuals this operation does not generate income in the IRPF, while a company must invoice a market rent to the partner and the income is taxed at 25%.
As you may have noticed, buying a property in the name of the company you own can be of great benefit to your wealth, but if this is the first time you are going to do a transaction like this, we recommend that you look into the subject in depth.
There are many financial advisors who specialise in this area and who will facilitate the process of buying a house with an LLC so that your investment is much safer and you do not have complications with the taxes and expenses that this type of purchase tends to generate.
Difference between Limited Liability Partnership and Limited Liability Company
In the UK context and under English terminology, the differences between an Limited Liability Partnership (LLC) and an Limited Liability Company (LTD) focus primarily on the nature and jurisdiction of these entities. It is important to note that the designation “LLC” is not commonly used in the UK; it is more prevalent in the US. The key characteristics and differences between an LTD company vs. LLC are set out below with the UK context in mind:
LTD (Limited Company)
- Jurisdiction: The LTD form is specific to the UK and other jurisdictions that follow similar legal practices.
- Type of entity: “Limited” refers to the limited liability of the shareholders, i.e. their liability is limited to the capital they have invested in the company. They are not personally liable for company’s debts.
- Categories: Within LTDs, there are mainly two categories: Private Limited Companies by Shares and Private Limited Companies by Guarantee. The former is the most common form, used for profit-making businesses, while the latter is often used for non-profit organizations.
- Advertising: LTD companies can choose not to list their shares on the stock exchange, and there are restrictions on the transfer of their shares.
LLC (Limited Liability Company)
- Jurisdiction: One of the main differences between an LTD company vs. an LLC company is jurisdiction. The LLC is a form of business structure primarily in the United States. It is not a recognised company structure in the UK under that specific name.
- Type of entity:Despite the differences, there are also similaraties between a limited partnership and a limited liability company, there are also some similarities. It also offers limited liability to its members, similar to LTDs. Each member’s liability is limited to its investment in the company.
- Characteristics: The LLC is known for its flexibility in taxation, allowing profits and losses to be passed directly to members without being subject to corporate tax, in some cases. It also offers a flexible management structure.
- Use in the UK: One thing that makes a difference between LLC and LTD is that, in the UK, the closest structure to a US LLC would be an LLP (Limited Liability Partnership), especially in terms of offering limited liability and allowing flexible management. LLPs are common among professionals such as lawyers, accountants and architects.
In summary, now that you know the characteristics and differences between LLC and LTD you have seen that, in the UK context, when we speak of a “Limited Company” or LTD, we are referring to a specific entity under UK law with limited liability for its shareholders. The “LLC” as such does not exist in the UK; instead, similar structures in terms of limited liability and flexibility would be the LLP for partnerships. Therefore, the main difference between a LTD company vs. LLC is whether or not it exists in the UK.The choice between forming an LTD or LLP will depend on the specific needs of the business, including considerations related to tax, investment, and operations.
Therefore, by knowing the differences between an LLC and an LTD and knowing the advantages and disadvantages of buying a house through a limited company, you will be able to make informed decisions.
