Buying an Airbnb with retained profits in Ltd company
Discussion
A flat has just come up for sale near my house that I quite like the look of, as an Airbnb investment.
I have the approx amount in a Ltd company bank account, which I consult through. Corporation tax is paid.
Is it possible / advisable to buy the flat using these funds?
Are the initial or ongoing costs tax deductible?
Does it matter that the main income of the Ltd company is a very different activity. Can the flat costs still be deducted against consultancy profits?
I have the approx amount in a Ltd company bank account, which I consult through. Corporation tax is paid.
Is it possible / advisable to buy the flat using these funds?
Are the initial or ongoing costs tax deductible?
Does it matter that the main income of the Ltd company is a very different activity. Can the flat costs still be deducted against consultancy profits?
I'm looking forward to the response on this, as I am about to do a very similar thing (albeit, not airbnb). However, having spoken to my accountant about it initially, my understanding (which I hope is correct) is that you will need to set up a "Special Purpose Vehicle", which acts as a 'sub-company' to your existing LTD company, for which it's sole purpose is the purchase, management and rental of property.
You would then set up a formal loan agreement between your two companies, such that you can move funds into the 'new' company for the purpose of providing funds for the deposit/purchase, stamp duty, professional fee's etc. In fact, in your case, everything you need to get the airbnb operational. (Your existing Ltd company cannot do this, if not the 'nature' of business).
Whilst this is all relatively straight forward, the downsides that I can see so far are that commercial mortgages (i.e. lending to ltd companies) are massively inflated compared to personal BTL mortgages. (In my situation, I am looking at a mortgage which on a like for like basis, even with 25% deposit) is around 50% more per month than an existing personal BTL that I have. Furthermore, the books for the "SPV" that you have set up will need treating as a standalone measure, for which accountancy costs also then need accounting for. Lastly, not all BTL commercial mortgage providers (e.g. TMW) will actually lend to an SPV whose only source of deposit is a loan, as described above).
Sorry I cannot answer all of your queries, but hope there is something of use there from my research thus far....but seeing as you have suggested you might not need a mortgage, you may very well have an easier ride....
You would then set up a formal loan agreement between your two companies, such that you can move funds into the 'new' company for the purpose of providing funds for the deposit/purchase, stamp duty, professional fee's etc. In fact, in your case, everything you need to get the airbnb operational. (Your existing Ltd company cannot do this, if not the 'nature' of business).
Whilst this is all relatively straight forward, the downsides that I can see so far are that commercial mortgages (i.e. lending to ltd companies) are massively inflated compared to personal BTL mortgages. (In my situation, I am looking at a mortgage which on a like for like basis, even with 25% deposit) is around 50% more per month than an existing personal BTL that I have. Furthermore, the books for the "SPV" that you have set up will need treating as a standalone measure, for which accountancy costs also then need accounting for. Lastly, not all BTL commercial mortgage providers (e.g. TMW) will actually lend to an SPV whose only source of deposit is a loan, as described above).
Sorry I cannot answer all of your queries, but hope there is something of use there from my research thus far....but seeing as you have suggested you might not need a mortgage, you may very well have an easier ride....
Edited by MattyD803 on Tuesday 22 February 10:54
If the property is purchased using company funds, does this mean that the property will be owned by the company?
If it is, it means that the company will now have a new trading activity - effectively it will be now running a holiday letting business on top of its consultancy activity.
If and when the company disposes of the property, the profit on disposal will be calculated using Capital Gains Tax rules but will be taxed at Corporation Tax rates.
Obviously, income generated by the property would be company income and also subject to Corporation Tax rather than Income Tax. You, as ever, will suffer personal Income Tax (and possibly Class 1 NI) on any income drawn from the company.
If it is, it means that the company will now have a new trading activity - effectively it will be now running a holiday letting business on top of its consultancy activity.
If and when the company disposes of the property, the profit on disposal will be calculated using Capital Gains Tax rules but will be taxed at Corporation Tax rates.
Obviously, income generated by the property would be company income and also subject to Corporation Tax rather than Income Tax. You, as ever, will suffer personal Income Tax (and possibly Class 1 NI) on any income drawn from the company.
Eric Mc said:
If the property is purchased using company funds, does this mean that the property will be owned by the company?
If it is, it means that the company will now have a new trading activity - effectively it will be now running a holiday letting business on top of its consultancy activity.
If and when the company disposes of the property, the profit on disposal will be calculated using Capital Gains Tax rules but will be taxed at Corporation Tax rates.
Obviously, income generated by the property would be company income and also subject to Corporation Tax rather than Income Tax. You, as ever, will suffer personal Income Tax (and possibly Class 1 NI) on any income drawn from the company.
Thanks for the questions. If it is, it means that the company will now have a new trading activity - effectively it will be now running a holiday letting business on top of its consultancy activity.
If and when the company disposes of the property, the profit on disposal will be calculated using Capital Gains Tax rules but will be taxed at Corporation Tax rates.
Obviously, income generated by the property would be company income and also subject to Corporation Tax rather than Income Tax. You, as ever, will suffer personal Income Tax (and possibly Class 1 NI) on any income drawn from the company.
Yes, owned outright by the company. There is sufficient retained profits from prior years, to buy outright.
Correct, it will broaden the scope of the Ltd company to include holiday letting. Is this permissible without setting up new structure? It’s currently a services company with no physical assets.
If I pay corp tax on just the gain on disposal, not the total amount treated as income, then that means there is no scope to use untaxed current year income to reduce tax bill, on the purchase?
I don’t draw much income from the company at present. Possiblly in future. Or maybe at some point I’ll quite the consultancy job, and seek Entrepeneurs relief
lizardbrain said:
Thanks for the questions.
Yes, owned outright by the company. There is sufficient retained profits from prior years, to buy outright.
Correct, it will broaden the scope of the Ltd company to include holiday letting. Is this permissible without setting up new structure? It’s currently a services company with no physical assets.
There are no laws prohibiting what activities a company can do as long as they are not illegal (drug running, for instance
)
There may be some restrictions in the company's Articles of Association though so you would need to check these just to be sure.
If I pay corp tax on just the gain on disposal, then that means there is no scope to use untaxed current year income to reduce tax bill, on the purchase?
Not sure what you are saying here. If the disposal creates a Capital Gain, then that gain will be taxable. If the company also has trading profits in that same year, through it's consultancy and/or its holiday let activity, then those trading profits are also taxable.
I don’t draw much income from the company at present. Possiblly in future. Or maybe at some point I’ll quite the consultancy job, and seek Entrepeneurs relief
Entrepreneurs relief no longer exist. It was replaced by Business Asset Disposal Relief (which is very similar).
If you wanted to claim Business Asset Disposal Relief, what would you be selling - the company, the building?Yes, owned outright by the company. There is sufficient retained profits from prior years, to buy outright.
Correct, it will broaden the scope of the Ltd company to include holiday letting. Is this permissible without setting up new structure? It’s currently a services company with no physical assets.
There are no laws prohibiting what activities a company can do as long as they are not illegal (drug running, for instance
)There may be some restrictions in the company's Articles of Association though so you would need to check these just to be sure.
If I pay corp tax on just the gain on disposal, then that means there is no scope to use untaxed current year income to reduce tax bill, on the purchase?
Not sure what you are saying here. If the disposal creates a Capital Gain, then that gain will be taxable. If the company also has trading profits in that same year, through it's consultancy and/or its holiday let activity, then those trading profits are also taxable.
I don’t draw much income from the company at present. Possiblly in future. Or maybe at some point I’ll quite the consultancy job, and seek Entrepeneurs relief
Entrepreneurs relief no longer exist. It was replaced by Business Asset Disposal Relief (which is very similar).
If you buy an ev for example, you get 100% capital allowance on full purchase price, but the full disposal amount counts as income?but you are saying that isn’t the case for property. Basically, nothing much happens up front. but on disposal you pay cgt at ct rates on the gain?
So I can net off utilities, cleaning. council tax etc against normal net profits. But Airbnb income is counted as normal,income too?
What about stamp duty, is that tax deductible?
In the long term, I’d likely liquidate everything, including selling the property, and then pay the “ER” to wind up, which was something like 10% last time I checked. Likely to be years away so it might all change?
So I can net off utilities, cleaning. council tax etc against normal net profits. But Airbnb income is counted as normal,income too?
What about stamp duty, is that tax deductible?
In the long term, I’d likely liquidate everything, including selling the property, and then pay the “ER” to wind up, which was something like 10% last time I checked. Likely to be years away so it might all change?
Edited by lizardbrain on Tuesday 22 February 11:32
lizardbrain said:
If you buy an ev for example, you get 100% capital allowance on full purchase price, but the full disposal amount counts as income?but you are saying that isn’t the case for property. Basically, nothing much happens up front. but on disposal you pay cgt at ct rates on the gain?
So I can net off utilities, cleaning. council tax etc against normal net profits. But Airbnb income is counted as normal,income too?
What about stamp duty, is that tax deductible?
In the long term, I’d likely liquidate everything, including selling the property, and then pay the “ER” to wind up, which was something like 10% last time I checked. Likely to be years away so it might all change?
YHM - and get an accountant.So I can net off utilities, cleaning. council tax etc against normal net profits. But Airbnb income is counted as normal,income too?
What about stamp duty, is that tax deductible?
In the long term, I’d likely liquidate everything, including selling the property, and then pay the “ER” to wind up, which was something like 10% last time I checked. Likely to be years away so it might all change?
Edited by lizardbrain on Tuesday 22 February 11:32
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