Buying a house to renovate from company funds

[buzzer]

My mate has a small metal Fabrication company that in the past has done rather well... there are several hundred thousand pounds in the company and he wants to use this to buy a house, do it up and then sell it, and maybe do another if that's successful...

Can he do this? any pitfalls?

[Eric Mc]

As long as the Memorandum and Articles of the company do not prohibit this type of activity, then there is no legal treason why the company cannot do it.

HOWEVER, there will be tax reasons why he should consider the various options open to him.

IF he does it through the company, the company will essentially be running a second trading activity to its fabrication activity i.e. a separate trade of property development. If it does this, it should really disclose the transactions on the property development side of its business under a separate set of figures within the overall activity of the company.
This will make the annual accounts a bit more complicated to prepare - and probably a bit more costly in accounting fees.

If and when the company sells the property - and makes a profit on the sale - it will pay Corporation Tax on the profit at 20%.
If it makes a loss on the property sale, the loss can be offset against the trading profit from the fabrication business in the same financial year. However, if it carries the loss forward to the next financial year, it can only offset the loss against future property trading profits only.

The alternative is to carry out the project as a personal one rather than through the company.

Strictly speaking, buying a property to "do up" and sell is really a trading activity as the project was started "with a view to making a profit". On that basis, profits should be taxed under Income Tax rules.

Many individuals, however, try to claim that these are "Capital Gains Tax" activities which, by and large, HMRC don't tend to query, unless the individual is a serial "house doer upper". If it's a "one off" project, then treating it as a Capital Gains Tax matter in the name of the individual might be a better option.

He needs to talk to his accountant.

[Mr Noble]

Trying to do it on a personal individual basis would surely mean that the money would need to be removed from the business and would therefor incur income tax upon removal.

[Eric Mc]

Mr Noble said:

Trying to do it on a personal individual basis would surely mean that the money would need to be removed from the business and would therefor incur income tax upon removal.

That is a possibility - although there are tax efficient ways of getting money out of limited companies - if you go about it correctly.

Let's face it, if the property was developed within the company and made a whopping profit (on which the company would pay Corporation Tax, of course), the individual is still faced with getting the money out of the company.

[sm1tty]

Would it not be easier for the company to loan the money to your mate and for him to buy the house personally? Company could even take a charge on the property if that was needed to reinforce the company's asset base.

[Eric Mc]

There are lots of permutations.

Loans by companies to participators (directors, employees, other officers, relatives etc) are fraught with tax and even legal implications so have to be structured very, very carefully.

[Martin4x4]

Mr Noble said:

Trying to do it on a personal individual basis would surely mean that the money would need to be removed from the business and would therefor incur income tax upon removal.

Not necessarily with a directors loan account.

[Eric Mc]

Martin4x4 said:

Mr Noble said:

Trying to do it on a personal individual basis would surely mean that the money would need to be removed from the business and would therefor incur income tax upon removal.

Not necessarily with a directors loan account.

As mentioned above, this can cause loads of problems for a director and/or the company, depending on the circumstances of the company and the way the loan is structured.
It is a possibility but may not be a feasible option.