what's wrong with this scenario
Discussion
There have been some houses come up locally which are "live to work" units. ie they have a 3 bed house out front and a 2500sqft commercial garage out back.
Developer has buggered up the layout of the building such that you have to have a commercial mortgage- he is also asking for the VAT on the commercial portion- worth around £19k in VAT.
i'm already a co-director and shareholder of a Ltd Co- call it ABC Ltd. Thsi is the main source of my income.
If i were to setup a separate LTD Co (XYZ ltd) to buy the house, of which i was sole s/holder and director (with a 3rd party co secretary) [or even setup a Ltd Co to buy a long lease from the landlord- ie me]. Could i register XYZ for VAT to recover the VAT on the building, and could i then charge ABC for the companies time- clearly charging VAT which was recoverable by ABC. Could i then withdraw the income from XYZ from the directors loan account (which would have leant XYZ the deposit)? thus the only tax to pay would be 19% with no personal liability? ABC would benefit from having a much simpler allowable expense to deal with and i could still take profits as and when necessary.
Is this sort of scheme illegal for tax and VAT purposes?
Developer has buggered up the layout of the building such that you have to have a commercial mortgage- he is also asking for the VAT on the commercial portion- worth around £19k in VAT.
i'm already a co-director and shareholder of a Ltd Co- call it ABC Ltd. Thsi is the main source of my income.
If i were to setup a separate LTD Co (XYZ ltd) to buy the house, of which i was sole s/holder and director (with a 3rd party co secretary) [or even setup a Ltd Co to buy a long lease from the landlord- ie me]. Could i register XYZ for VAT to recover the VAT on the building, and could i then charge ABC for the companies time- clearly charging VAT which was recoverable by ABC. Could i then withdraw the income from XYZ from the directors loan account (which would have leant XYZ the deposit)? thus the only tax to pay would be 19% with no personal liability? ABC would benefit from having a much simpler allowable expense to deal with and i could still take profits as and when necessary.
Is this sort of scheme illegal for tax and VAT purposes?
pugwash4x4 said:
There have been some houses come up locally which are "live to work" units. ie they have a 3 bed house out front and a 2500sqft commercial garage out back.
Developer has buggered up the layout of the building such that you have to have a commercial mortgage- he is also asking for the VAT on the commercial portion- worth around £19k in VAT.
i'm already a co-director and shareholder of a Ltd Co- call it ABC Ltd. Thsi is the main source of my income.
If i were to setup a separate LTD Co (XYZ ltd) to buy the house, of which i was sole s/holder and director (with a 3rd party co secretary) [or even setup a Ltd Co to buy a long lease from the landlord- ie me]. Could i register XYZ for VAT to recover the VAT on the building, and could i then charge ABC for the companies time- clearly charging VAT which was recoverable by ABC. Could i then withdraw the income from XYZ from the directors loan account (which would have leant XYZ the deposit)? thus the only tax to pay would be 19% with no personal liability? ABC would benefit from having a much simpler allowable expense to deal with and i could still take profits as and when necessary.
Is this sort of scheme illegal for tax and VAT purposes?
What a great question! I haven't a damn clue of the answer (maybe 42), but I'll watch this thread with interest!Developer has buggered up the layout of the building such that you have to have a commercial mortgage- he is also asking for the VAT on the commercial portion- worth around £19k in VAT.
i'm already a co-director and shareholder of a Ltd Co- call it ABC Ltd. Thsi is the main source of my income.
If i were to setup a separate LTD Co (XYZ ltd) to buy the house, of which i was sole s/holder and director (with a 3rd party co secretary) [or even setup a Ltd Co to buy a long lease from the landlord- ie me]. Could i register XYZ for VAT to recover the VAT on the building, and could i then charge ABC for the companies time- clearly charging VAT which was recoverable by ABC. Could i then withdraw the income from XYZ from the directors loan account (which would have leant XYZ the deposit)? thus the only tax to pay would be 19% with no personal liability? ABC would benefit from having a much simpler allowable expense to deal with and i could still take profits as and when necessary.
Is this sort of scheme illegal for tax and VAT purposes?
I'm not going to answer the questions posed as they are far too specific. However, I think pugwash should be aware of the following:
A limited company who's main source of income is a rented property or properties is looked on as an "investment" company rather than a "trading" company. Therefore, it cannot make use of the lower rates of Coprporation Tax available to "small trading companies".
Losses from rentals can only be offset against future profits from the same individual property. They cannot be offset against other income in the same year (that only applies to "trading" losses).
When the company eventually disposes of its property/properties, it will be subject to Capital Gains Tax charged at its top Corporation Tax rate. Limited companies cannot avail of the individual Capital Gains Tax personal Allowance - currently £9,200. A disposal of a property owned jointly by two individuals could attract allowances of £18,400 (£9,200 x 2) whereas a property owning company with two shareholders/directors would attract no allowances at all if and when the properties were sold. The only way to trigger the allowances in this case would be to sell the entire company and its assets i.e. the properties.
A limited company who's main source of income is a rented property or properties is looked on as an "investment" company rather than a "trading" company. Therefore, it cannot make use of the lower rates of Coprporation Tax available to "small trading companies".
Losses from rentals can only be offset against future profits from the same individual property. They cannot be offset against other income in the same year (that only applies to "trading" losses).
When the company eventually disposes of its property/properties, it will be subject to Capital Gains Tax charged at its top Corporation Tax rate. Limited companies cannot avail of the individual Capital Gains Tax personal Allowance - currently £9,200. A disposal of a property owned jointly by two individuals could attract allowances of £18,400 (£9,200 x 2) whereas a property owning company with two shareholders/directors would attract no allowances at all if and when the properties were sold. The only way to trigger the allowances in this case would be to sell the entire company and its assets i.e. the properties.
Edited by Eric Mc on Tuesday 25th September 08:20
Srebbe- how did i know that this sort of thing would interest you 
good points Eric, hadn't thought of the investment or CGT side of things- however they are not insurmountable, just need to make sure that everything is setup in the right way.
i am hoping to say that the LTd Co operate those premises as it's main place to carry on business - thinking about i don't even have to have a LTd CO, i could just as easily set myself up as a VAT registered s/trader or even an LLP- it's the claiming back of the VAT that i am interested in as well as the benefits of claiming business expenses relating to the property- if you avhe a commercial morgage on a comercial property then one can claim the interest payments against tax liability.
as to the questions of financing and mortaging. if your property has less than 40% of it's area based on a sq ft floor space % then you can mortgage the property as a residential with all the benefits of that- such as 15% sefl certs etc etc. Anythin over the 40% mark has to be done as a commercial mortgage with at least 30% down- now that would be fine if i was goign to use this property for a business, but i'm not. I have no interest in putting a susbtantial amount of money into my home (a pretty weak investment tool at the moment) when i can use it more effectively investing in my business. With the property that i am looking at the split is 42% commercial- now this is excessively short sighted and means that the developer has shot himself in the foot (the market that can take advantage of this sotr of property is now tiny)- consequently out of 12 units he has only been able to sell 6! at £350k for each property he has lost out on the income of £2mill from the property (having already spent out money to develope them in the first place), prices are stagnating (as are sales) and he's got the cheek to ask the buyer to pay legal expenses. needless to say i won't be buying for 6-12 months (if i do) as i reckon by that time he will be fairly desperate to sell into a shrinking market.
another spanner in the works is that the property developer is charging VAT (obviously becuase he has claimed the VAT back on the build costs)- again i think this is short sighted as he is effectively increasing the price by 5% of the total sale price- foolish man.
My one dislike of this setup is that the property may well be difficult to move on- therefore i am effectively in the property for the long haul- it's gonig to be more a home than an investment!
good points Eric, hadn't thought of the investment or CGT side of things- however they are not insurmountable, just need to make sure that everything is setup in the right way.
i am hoping to say that the LTd Co operate those premises as it's main place to carry on business - thinking about i don't even have to have a LTd CO, i could just as easily set myself up as a VAT registered s/trader or even an LLP- it's the claiming back of the VAT that i am interested in as well as the benefits of claiming business expenses relating to the property- if you avhe a commercial morgage on a comercial property then one can claim the interest payments against tax liability.
as to the questions of financing and mortaging. if your property has less than 40% of it's area based on a sq ft floor space % then you can mortgage the property as a residential with all the benefits of that- such as 15% sefl certs etc etc. Anythin over the 40% mark has to be done as a commercial mortgage with at least 30% down- now that would be fine if i was goign to use this property for a business, but i'm not. I have no interest in putting a susbtantial amount of money into my home (a pretty weak investment tool at the moment) when i can use it more effectively investing in my business. With the property that i am looking at the split is 42% commercial- now this is excessively short sighted and means that the developer has shot himself in the foot (the market that can take advantage of this sotr of property is now tiny)- consequently out of 12 units he has only been able to sell 6! at £350k for each property he has lost out on the income of £2mill from the property (having already spent out money to develope them in the first place), prices are stagnating (as are sales) and he's got the cheek to ask the buyer to pay legal expenses. needless to say i won't be buying for 6-12 months (if i do) as i reckon by that time he will be fairly desperate to sell into a shrinking market.
another spanner in the works is that the property developer is charging VAT (obviously becuase he has claimed the VAT back on the build costs)- again i think this is short sighted as he is effectively increasing the price by 5% of the total sale price- foolish man.
My one dislike of this setup is that the property may well be difficult to move on- therefore i am effectively in the property for the long haul- it's gonig to be more a home than an investment!
VAT on property is extremely complicated and a very specialist area. DO NOT proceed down the reclaiming of VAT on property costs without getting GOOD advice on the ramifications.
Also, be aware that if the business starts collecting EXEMPT income in the form of rents, it could be walking blindfold into the minefield that are the "VAT Partial Exemption Regulations".
Be VERY, VERY careful on this.
Also, be aware that if the business starts collecting EXEMPT income in the form of rents, it could be walking blindfold into the minefield that are the "VAT Partial Exemption Regulations".
Be VERY, VERY careful on this.
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