Purchasing property within ltd company

[Shnozz]

Just trying to gauge what can and cannot be done.

Can a limited company purchase residential property? (not the primary sector within which ltd company operates)

Can this be tax advantageous/deductible?

Is it possible for the company to secure a mortgage based on profits if needs be?

Can such property include foreign property?

[Eric Mc]

Simple answer is yes. As with everything in accountancy and tax, there are both advantages and disadvantages.

If a property is owned by a company, the profits generated from rents will be taxed at Corporation Tax rates, which are generally lower than personal Income Tax rates.

Also, Capital Gains Tax on company gains are taxed at the Corporation Tax rate, which is lower than Capital Gains tax rates.

The main disadvantage arises when the owners of the company extract money out of the company. At that point, Income Tax will be payable and possibly NI (depending on how the money is extracted).

Also, companies do not receive the annual Capital Gains Tax allowance. This can be an important relief in CGT and can make a company disposal more expensive tax wise than a personal disposal - especially if the asset is owned by more than one person.

[Jobbo]

Shnozz said:

(not the primary sector within which ltd company operates)

If the company's articles of association don't specify the nature of the business as one of the property purposes, it may be impossible to get a mortgage. It may also be impossible to change the nature of the business appropriately but continue to run the company's normal business if it's a pre-existing trading company. You'd almost certainly be better off setting up a new company for property ownership.

[Shnozz]

Eric Mc said:

Simple answer is yes. As with everything in accountancy and tax, there are both advantages and disadvantages.

If a property is owned by a company, the profits generated from rents will be taxed at Corporation Tax rates, which are generally lower than personal Income Tax rates.

Also, Capital Gains Tax on company gains are taxed at the Corporation Tax rate, which is lower than Capital Gains tax rates.

The main disadvantage arises when the owners of the company extract money out of the company. At that point, Income Tax will be payable and possibly NI (depending on how the money is extracted).

Also, companies do not receive the annual Capital Gains Tax allowance. This can be an important relief in CGT and can make a company disposal more expensive tax wise than a personal disposal - especially if the asset is owned by more than one person.

Thanks Eric - very helpful as always. CGT was a consideration although couldn't see it would be much different from a personal purchase.

What is the BIK situation if the director resided in the property? Similarly (in the case of a foreign property), and the property was part tenanted by a director and part rented to A N Other, would BIK apply to a commercial rental rate for the period the director tenanted the property? (and then Corporation tax applied to the remaining rental yield).

[Eric Mc]

If a director has personal use from any company owned asset , then there will be a BIK charge.

[Shnozz]

Jobbo said:

Shnozz said:

(not the primary sector within which ltd company operates)

If the company's articles of association don't specify the nature of the business as one of the property purposes, it may be impossible to get a mortgage. It may also be impossible to change the nature of the business appropriately but continue to run the company's normal business if it's a pre-existing trading company. You'd almost certainly be better off setting up a new company for property ownership.

Thanks Jobbo.

The issue if a new company was set up would then be how to capitalise that business. I ideally want to allocate cash from a non-property business into property,

[malks222]

I've vaguely started to looking into this and still not come to a conclusive answer, but my findings have been:

Buy property personally:
- pay tax (income/ dividend/ NI) removing cash from LTD company
- pay tax on any profit from rent (see recent government changes reducing mortgage tax deductions) not great if you are already in the 40% bracket
- pay CGT if/when you sell the property
- subject to BTL mortgage stress tests/ affordability checks etc.......
- depending on value of property Stamp Duty could be less for you personally

Buying property through LTD company:
- you don't need to remove the cash from business as the business owns the asset
- any profit from rent is subject to corporation tax 20%
- removing money from the company is subject to tax (income/ dividend/ NI) depending how you plan on paying yourself
- Company is restricted to commercial lenders and not mortgage interest rates not as good as normal personal lending (I need to do more research on this)
- if/ when you sell the property, any profit the business makes that year is subject to 20% corporation tax, then you are subject to personal tax as/ when you remove that cash from the business too.
- accountancy costs for sorting all this


you also have to consider what the future holds- will the government go after business for taxes (increase corp tax, increase dividend rates etc....) or will the continue to go after BTL landlords? or a mixture of both....... not sure anyone can really answer that, but you need to think to the future about what changes could impact you.

that all said, my main reason for looking into this is not generate 'income' for myself just now. I was looking at this as a way of creating a limited company that could provide me a passive income in the future, to allow me to 'retire' early (I wouldn't be properly retired as I'd still be managing a limited company and portfolio of BTL's) but would hopefully mean I could stop doing mon-fri/9-5pm as I currently do.

sorry it was a bit of a ramble, but you need to speak to your accountant and see how the figures stack up.......

[Shnozz]

Thanks Malks - ramble or not the list was a useful succinct pros and cons.

The rental income side is only partly relevant - the idea here was to use profits to buy property and then the director to live in said property.

Potentially the company may then become dormant in a few years in any event.

The advantage of continuing to offset mortgage interest against tax is a bit of a moot point as I think I would have to buy outright in view of the lending criteria on mortgages to businesses.

[Jobbo]

Shnozz said:

the idea here was to use profits to buy property and then the director to live in said property.

Benefit in kind is going to be a tax problem there, but if you have any sort of mortgage it's almost certain to stipulate nobody connected to the company can reside in the property.

Capitalising a new company; that's not my area but when I put my old house into a company earlier this year, I just transferred it in (paying the 3% SDLT surcharge on market value, but it was still the most efficient thing to do) and took out the mortgage advance, leaving a loan from me as director into the company of about £70k. Which means I can take £70k of rental profits out before I start to suffer any income tax, at least. I suspect your circumstances are not quite as simple as mine were, though.

[sleepezy]

Shnozz said:

The issue if a new company was set up would then be how to capitalise that business. I ideally want to allocate cash from a non-property business into property,

Looking into this now - my solution (being checked over, just need to get around to it) is
1 to do a Section 75 reorganisation putting a holding company above the trading company that is generating the cash
2 divi up spare cash from trading to holding company
3 set up a separate property company wholly owned by the holding company
4 holding company can either lend (preference) or equity into the property company (or holding company can own property itself and scrub step 3)

You could lend money from the cash generating company into a property company but benefit for dividend is that it will take it out of the trading business in case anything in there turns sour. Leaving as a lend across means that the loan could be called on.

[Alpinestars]

Not sure how much the property in question is worth, but don't forget the penal rules for "high value" residential property owned by companies.

You might also taint the trading status of the trading company if SSE or ER is important to you.

[sleepezy]

Shnozz (mainly)

Just to follow up on this as I hate leaving threads without an answer.

The above steps do work out in my circumstances. A simple share for share swap (advice is that I don't even need preclearance from HMRC) to put in a topco and then make funds available from there either through direct investment, loan, equity into new subsidiaries etc.

However, this is just for my personal circumstances - it will allow me to invest gross proceeds (after CT obviously), avoid punitive taxes & other deductions on withdrawals (which, for personal reasons, are comparably high for me). Yes there are issues with the allowances that are currently available (ER being the main one in my circumstances) but that may not be around when I finally come to exit (if I do and don't decide to leave it all in there to provide a regular income). I just don't know what the playing field will be like in X number of years time so I will prefer to take the advantage now, not keep fingers crossed.

Note that I am not just investing in property though, my main consultancy business gives me the opportunity to invest debt or equity into businesses that I am turning around. The proposed structure will allow me to do all of this, with segregation, efficiently.

My advice to anyone is to think it all through properly, set out what you want to invest in, risk approach and likely timescales to withdraw as income or lump sum - and then get proper professional advice.

I'm an accountant by trade, and I went to see an accountant for an opinion! (OK different fields but you get my gist!)

Good luck all.

[Countdown]

zubzob said:

Can I hijack this thread a bit? I am thinking about using spare cash in a Vat regged, LTD company to buy a holiday home outright, in Scotland.

I've never bought any kind of property before, so a bit naive.

- Has any one done this, in practice? Is it much more hasslee/expensive as buying as residential property?
- Would I have to charge VAT on rent? Does everyone do this? Do non Ltd owners have advantage here?
- I'm A FTB, but guessing no FTB discount. Would I lose my residential FTB status being sole director?
- If I reinvest all profits in the property, and run at breakeven, does it make sense, tax wise?

1. All our properties are on long term leases but, AFAICS, the paperwork seems similar.

2. if the property is owned by the company then yes, you would have to charge VAT. being Ltd or not Ltd has no impact on whether or not you charge VAT. If the overall turnover of the company exceeds the VAT threshold you charge VAT

3. Are you referring to the discount that people on low incomes get for buying starter homes?

4. Capex won’t be tax deductible. Capital allowances are. Running it at break even suggests that you wont actually make a profit in which case you’re right there won’t be any tax to pay, but what would be the point of having an asset which doesn’t make a profit?

[Jobbo]

Countdown said:

2. if the property is owned by the company then yes, you would have to charge VAT. being Ltd or not Ltd has no impact on whether or not you charge VAT. If the overall turnover of the company exceeds the VAT threshold you charge VAT

That's not correct (for England at least - I think the same applies in Scotland but I'm not able to confirm). Residential property is always going to be exempt from VAT even if held in a company. Commercial property is ordinarily exempt but you can bring a commercial property within the scope of VAT (in order to recover VAT on expenditure, for instance) by waiving the VAT exemption; then you'd charge VAT on the rent. But that only applies to commercial property and only in those specific circumstances.

[Jobbo]

I know Scotland is not the same as England for stamp duty, but they have some mirroring provisions. In England, any company buying a residential property pays the 3% surcharge, so not only do you not get any FTB exemption, you have to pay the usual stamp duty plus an additional 3% on the whole price.

However, the property is then owned by the company not you; so the FTB exemption should still be available.

Note the caveat that I can only talk about England and Scotland is not necessarily the same.

[Alpinestars]

Jobbo said:

Countdown said:

2. if the property is owned by the company then yes, you would have to charge VAT. being Ltd or not Ltd has no impact on whether or not you charge VAT. If the overall turnover of the company exceeds the VAT threshold you charge VAT

That's not correct (for England at least - I think the same applies in Scotland but I'm not able to confirm). Residential property is always going to be exempt from VAT even if held in a company. Commercial property is ordinarily exempt but you can bring a commercial property within the scope of VAT (in order to recover VAT on expenditure, for instance) by waiving the VAT exemption; then you'd charge VAT on the rent. But that only applies to commercial property and only in those specific circumstances.

Broadly correct.

Holiday lets are standard rated for VAT.

[Jobbo]

Alpinestars said:

Broadly correct.

Holiday lets are standard rated for VAT.

Good point - they don't just count as a normal residential property, for planning purposes either. A holiday letting is not a tenancy (which would not be subject to VAT), it is a supply of a service.

[Eric Mc]

Holiday lets are generally treated as a "business" rather than an investment and the tax and VAT regulations broadly reflect this - the view being that they are operating in a similar tax landscape that applies to hotels, guest houses and other holiday activities based on making land and property available to a holiday maker (such as a campsite).

If the "option to VAT" is taken on a residential or commercial property, this has massive ramifications fort when the property is eventually disposed of.

[Alpinestars]

zubzob said:

Can I hijack this thread a bit? I am thinking about using spare cash in a Vat regged, LTD company to buy a holiday home outright, in Scotland.

I've never bought any kind of property before, so a bit naive.

- Has any one done this, in practice? Is it much more hasslee/expensive as buying as residential property?
- Would I have to charge VAT on rent? Does everyone do this? Do non Ltd owners have advantage here?
- I'm A FTB, but guessing no FTB discount. Would I lose my residential FTB status being sole director?
- If I reinvest all profits in the property, and run at breakeven, does it make sense, tax wise?

What’s your plan for exit?

1. Sell property and reinvest - any gains will be taxable but you might be able to defer any tax.
2. Sell property and take a dividend - sale is taxable as is the dividend. Inefficient.
3. Sell shares of the company - you should qualify for entrepreneurs’ relief.

If you held the property outside the company, any gain would be subject to capital gains tax, which should result in the same or better result than holding the property in the company.

[trowelhead]

I have a small portfolio all owned inside its own Ltd co.

People really tend to make it seem harder than it is. Not really much harder than buying a normal resi in your own name.

Feel free to ask any q's i'll do my best to answer

I loaned money from my trading company to my property company to capitalise it.