Afternoon guys
Its my first post but let me say this website is amazing and I've been reading the forum daily. I've only been in practice a year now so still finding my feet.
Anyway a client came in today and asked if the following scenario was possible in order to reduce his income tax bill. He currently has 8 properties out on rent for which the mortgage interest rates are very low so his rental income is quite high.
He is thinking of forming a ltd company and then renting the properties to the ltd company for a small sum (just enough to cover his mortgage and a bit of expendature) then using the ltd company to rent the property out again to the tenants through a letting agents.
Although I can see the saving would be significant as he is a high rate tax payer currently, would this foul of any legislation?
I dont want to give him any wrong advice so I said I'll look into it for him before he goes ahead with it. Any ideas? Thanks in advance
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I have had a similar client and the verdict was that a lease would need to be done between him and the limited company and the mortgage providers need to be informed as they will want to have first charge over the lease if ever in a situation that they have to take claim over the property. If he was just subleasing to the limited company without the mortgage companies being aware, he may breach their condition. Mortgage companies are familiar with this request as it is quite common as a tax saver and as long as they always have first charge on the lease they are pretty happy with agreeing to it.
Id be interested in hearing other views on this..
Mortgage company consenting
I have had a similar client and the verdict was that a lease would need to be done between him and the limited company and the mortgage providers need to be informed as they will want to have first charge over the lease if ever in a situation that they have to take claim over the property. If he was just subleasing to the limited company without the mortgage companies being aware, he may breach their condition. Mortgage companies are familiar with this request as it is quite common as a tax saver and as long as they always have first charge on the lease they are pretty happy with agreeing to it.
Id be interested in hearing other views on this..
He has spoken to the mortgage company and they have consented that as long as the lease term does not exceed 4 years. Going to speak with a few friends amd see what the consensus is.
Think the thing always to remember is that if something sounds too good to be true, it is.
Although I can't remember the tax legislation if he's connected with the company then I'm pretty sure he's forced to rent to the company at market rate for tax purposes. The basic rule is that if an arrangement is gone into, the prime motive of which being to save tax, then it won't stand up.
Even if he could arrange it and managed to accumulate funds in the company, having only suffered say 20% tax, as a property letting company there are no capital tax breaks for when he wants to take the money out (ie CGT & IHT) as these only apply to trading companies.
Totally see your point here that the only reason for the ltd company is to reduce his tax bill but isnt that what most people use ltd companies for?! It just seems slightly unfair large corporations can set up in offshore jurisdications to avoid tax completley yet this client only wants to reduce his tax paid. Oh well I'll have to see what everyones thoughts are before advising him what to do.
Thanks
I wouldn't
Think the thing always to remember is that if something sounds too good to be true, it is.
Although I can't remember the tax legislation if he's connected with the company then I'm pretty sure he's forced to rent to the company at market rate for tax purposes. The basic rule is that if an arrangement is gone into, the prime motive of which being to save tax, then it won't stand up.
Even if he could arrange it and managed to accumulate funds in the company, having only suffered say 20% tax, as a property letting company there are no capital tax breaks for when he wants to take the money out (ie CGT & IHT) as these only apply to trading companies.