BTL purchase with company cash?
Discussion
I an opportunity to buy another BTL (which can't be mortgaged) and I have enough cash in my ltd company to buy it. The way I see it I have two options:
1. Pay the cash as a dividend to myself, take the high rate income tax hit, then buy it as an individual alongside my other BTL’s. I would then have to pay my self a lower salary/dividend going forward keep me under the higher rate of tax.
2. Use my company to buy it as an asset. This avoids the income tax hit on the capital, but I assume the rent would be subject to corporation tax.
With both scenarios my yearly personal income would stay the same at just below the higher tax rate. In scenario 1 I would draw less from my company to balance the increased BTL income. In scenario 2 the rent would build up in the company as I couldn’t draw it down without going over the higher rate of tax.
What would be the best (ie most tax efficient) option?
Also my company is registered (with HMRC) as an IT services company, what happens when if/when it starts buying properties?
1. Pay the cash as a dividend to myself, take the high rate income tax hit, then buy it as an individual alongside my other BTL’s. I would then have to pay my self a lower salary/dividend going forward keep me under the higher rate of tax.
2. Use my company to buy it as an asset. This avoids the income tax hit on the capital, but I assume the rent would be subject to corporation tax.
With both scenarios my yearly personal income would stay the same at just below the higher tax rate. In scenario 1 I would draw less from my company to balance the increased BTL income. In scenario 2 the rent would build up in the company as I couldn’t draw it down without going over the higher rate of tax.
What would be the best (ie most tax efficient) option?
Also my company is registered (with HMRC) as an IT services company, what happens when if/when it starts buying properties?
A number of issues -
i) is the company ALLOWED to buy land and property as investment (check the Memorandum and Articles). It probably is but do check.
ii) the land and building will probably become an investment asset of the company as it will be used to generate rental income - which is classified as investment income (although there are occasions when HMRC will deem rental income to be part of normal trading).
iii) the rental profits will be taxed at the Corporation Tax rates. If the company generates losses either from its normal trade or its rental activity, there may be restrictions in how the losses are offset against each other
iv) if and when the property is sold, the COMPANY will pay Capital Gains Tax (CGT) on any gain - at its Corporation Tax rates (currently 20%). Personal CGT is at 18% or 28%.
v) for CGT purposes limited companies can still avail of the old "inflation proofing" formula using the Retail Price Index I(called "Indexation Relief). This has not been available to individuals for many years
v) Limited companies DO NOT get the annual CGT allowance (currently £11,000 per person). So, on disposal, the gain (after Indexation) is taxed in full
For a person, the gain (with no indexation) will be taxed AFTER the personal CGT allowance is deducted.
vi) Finally, it's all well and good having the gain processed through a limited company (as the gain will be subject to Indexation and taxed at 20%) but the problem remains of extracting the gain out of the company. If and when that is done, it will probably be subject to Income Tax and probably at least some of that Income Tax will be charged at the higher rates.
So, as ever with tax, there is no simple "best solution".
i) is the company ALLOWED to buy land and property as investment (check the Memorandum and Articles). It probably is but do check.
ii) the land and building will probably become an investment asset of the company as it will be used to generate rental income - which is classified as investment income (although there are occasions when HMRC will deem rental income to be part of normal trading).
iii) the rental profits will be taxed at the Corporation Tax rates. If the company generates losses either from its normal trade or its rental activity, there may be restrictions in how the losses are offset against each other
iv) if and when the property is sold, the COMPANY will pay Capital Gains Tax (CGT) on any gain - at its Corporation Tax rates (currently 20%). Personal CGT is at 18% or 28%.
v) for CGT purposes limited companies can still avail of the old "inflation proofing" formula using the Retail Price Index I(called "Indexation Relief). This has not been available to individuals for many years
v) Limited companies DO NOT get the annual CGT allowance (currently £11,000 per person). So, on disposal, the gain (after Indexation) is taxed in full
For a person, the gain (with no indexation) will be taxed AFTER the personal CGT allowance is deducted.
vi) Finally, it's all well and good having the gain processed through a limited company (as the gain will be subject to Indexation and taxed at 20%) but the problem remains of extracting the gain out of the company. If and when that is done, it will probably be subject to Income Tax and probably at least some of that Income Tax will be charged at the higher rates.
So, as ever with tax, there is no simple "best solution".
Eric Mc said:
A number of issues -
i) is the company ALLOWED to buy land and property as investment (check the Memorandum and Articles). It probably is but do check.
ii) the land and building will probably become an investment asset of the company as it will be used to generate rental income - which is classified as investment income (although there are occasions when HMRC will deem rental income to be part of normal trading).
iii) the rental profits will be taxed at the Corporation Tax rates. If the company generates losses either from its normal trade or its rental activity, there may be restrictions in how the losses are offset against each other
iv) if and when the property is sold, the COMPANY will pay Capital Gains Tax (CGT) on any gain - at its Corporation Tax rates (currently 20%). Personal CGT is at 18% or 28%.
v) for CGT purposes limited companies can still avail of the old "inflation proofing" formula using the Retail Price Index I(called "Indexation Relief). This has not been available to individuals for many years
v) Limited companies DO NOT get the annual CGT allowance (currently £11,000 per person). So, on disposal, the gain (after Indexation) is taxed in full
For a person, the gain (with no indexation) will be taxed AFTER the personal CGT allowance is deducted.
vi) Finally, it's all well and good having the gain processed through a limited company (as the gain will be subject to Indexation and taxed at 20%) but the problem remains of extracting the gain out of the company. If and when that is done, it will probably be subject to Income Tax and probably at least some of that Income Tax will be charged at the higher rates.
So, as ever with tax, there is no simple "best solution".
Thanks eric, I suspected it wouldn't be black and white i) is the company ALLOWED to buy land and property as investment (check the Memorandum and Articles). It probably is but do check.
ii) the land and building will probably become an investment asset of the company as it will be used to generate rental income - which is classified as investment income (although there are occasions when HMRC will deem rental income to be part of normal trading).
iii) the rental profits will be taxed at the Corporation Tax rates. If the company generates losses either from its normal trade or its rental activity, there may be restrictions in how the losses are offset against each other
iv) if and when the property is sold, the COMPANY will pay Capital Gains Tax (CGT) on any gain - at its Corporation Tax rates (currently 20%). Personal CGT is at 18% or 28%.
v) for CGT purposes limited companies can still avail of the old "inflation proofing" formula using the Retail Price Index I(called "Indexation Relief). This has not been available to individuals for many years
v) Limited companies DO NOT get the annual CGT allowance (currently £11,000 per person). So, on disposal, the gain (after Indexation) is taxed in full
For a person, the gain (with no indexation) will be taxed AFTER the personal CGT allowance is deducted.
vi) Finally, it's all well and good having the gain processed through a limited company (as the gain will be subject to Indexation and taxed at 20%) but the problem remains of extracting the gain out of the company. If and when that is done, it will probably be subject to Income Tax and probably at least some of that Income Tax will be charged at the higher rates.
So, as ever with tax, there is no simple "best solution".
I'll probably buy it outside of my company to keep things simpler.
Worth bearing in mind that if you have to extract the cash from your company to purchase the BTL, then depending on the amount you need to extract (ie depending on the cost of the BTL) if you push your income over £100k you are in marginal tax rates of 60% territory due to the withdrawal of the Personal Allowance. That's painful.
I've used the cash in my IT services company to buy renovation properties without any problems. They started as renovation projects and when done, I let them out.
I appreciate all the issues that Eric has highlighted above, but if you draw funds from the company, unless the property is very cheap, your personal tax bill for doing that could be half of the purchase price. Which makes the whole excercise pointless.
I appreciate all the issues that Eric has highlighted above, but if you draw funds from the company, unless the property is very cheap, your personal tax bill for doing that could be half of the purchase price. Which makes the whole excercise pointless.
I definitely wasn't saying don't do it - but just be aware of the ramifications.
A few years ago my general advice would have been to keep investment properties out of your limited company.
However, there have been substantial and far reaching changes to both Income Tax and Capital Gains Tax since 2008 which have made the assessment of the best route to take much more complicated.
The erosion of the personal tax allowances as outlined above is one.
Another is the clawback of Child Allowance (if you or your partner's income exceeds £50,000 in a tax year)
The restriction on how much you can extract CGT free on a company "striking off" is another.
A few years ago my general advice would have been to keep investment properties out of your limited company.
However, there have been substantial and far reaching changes to both Income Tax and Capital Gains Tax since 2008 which have made the assessment of the best route to take much more complicated.
The erosion of the personal tax allowances as outlined above is one.
Another is the clawback of Child Allowance (if you or your partner's income exceeds £50,000 in a tax year)
The restriction on how much you can extract CGT free on a company "striking off" is another.
Couple of points that have been missed.
The first is VAT. If the property is bought into a trading company, and VAT is not charged on the rental income (probably the case if it is residential property), it could restrict the amount of VAT the company can recover.
If you want to buy it into a company, the best way is probably to set up a subsidiary of the trader, put cash into the sub by way of a loan or share capital, and let the sub buy the property. As long as you don't group the companies for VAT purposes, VAT recovery restrictions would not apply.
The second is entrepreneurs' relief. If you hold the property in the company (or a sub), a sale of the shares of the trader might not qualify for ER if the property is a sizeable asset/income of the company.
The first is VAT. If the property is bought into a trading company, and VAT is not charged on the rental income (probably the case if it is residential property), it could restrict the amount of VAT the company can recover.
If you want to buy it into a company, the best way is probably to set up a subsidiary of the trader, put cash into the sub by way of a loan or share capital, and let the sub buy the property. As long as you don't group the companies for VAT purposes, VAT recovery restrictions would not apply.
The second is entrepreneurs' relief. If you hold the property in the company (or a sub), a sale of the shares of the trader might not qualify for ER if the property is a sizeable asset/income of the company.
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