Client was to use Ltd Co funds to buy house

Client was to use Ltd Co funds to buy house

Didn't find your answer?

Client has £50k sitting in his company bank accounts and wants to use it to buy or contribute to a house purchase
He is the only director shareholder and uses the majority of his standard rate bank with minimum salary and dividends
He personally owns a house which is rented out with large mortgage
He own his own house and has small mortgage on it – wants to move to a different house (with a cost of about £300k) and rent out the existing one which he currently lives in
Can the company buys part of his new house ? – if so what BIK impact here – if I am right and the BIK is about the director occupying the house how would this be calculated in practice?

Sorry but I have not come across this type of BIK before

Thanks

Replies (15)

Please login or register to join the discussion.

Euan's picture
By Euan MacLennan
18th Oct 2010 14:26

The options

The one you would not touch with a barge pole is any idea of the company buying part of the house, presumably in some sort of joint ownership with the individual client.  This would be legally difficult and would attract the BIK charge on the provision of living accommodation.

Option 2 is for the company to lend £50k to the individual client, who I assume is a shareholder.  The loan would be subject to the refundable s.419 (or whatever the section is under the new Act) tax of 25% of the outstanding balance.  If the client were to pay interest to the company of not less than the official rate (currently, 4% p.a.), there would be no BIK - otherwise, there is a BIK on the cheap loan of the difference between 4% and whatever interest he pays.

Option 3 is to pay out the £50k as a dividend, pay the extra higher rate tax that will be due and the client can then do what he likes with the balance.

As a variation, start as a loan under Option 2 and repay the loan over a few years using dividends under Option 3, which might save the client any higher rate tax, depending on his other income.

Thanks (0)
By aiwalters
18th Oct 2010 18:05

company can buy house and rent it

there is no reason why the company cannot buy (part of) the house and rent it out to the director (at market value) which will not attract a BIK .

 

Otherwise, to work out the BIK, it is the annual value of the house, plus, if the house is expensive (more than £75000) there is an additional charge of (cost - £75000) x official rate of interest. 

 

Subtract from all this the contribution paid by the employee. If done correctly, this will leave no BIK.

Thanks (0)
avatar
By spayne
19th Oct 2010 09:36

Thanks

What is the 4% ?- is it the HMRC official rate?

Thanks (0)
avatar
By J Lessels
25th Oct 2010 11:16

CGT

Remember that if the company buys any part of the house, and it is subsequently sold at a profit you lose the CGT exemption. The comapny buying the house is a bad idea. Also if the occupier is paying rent, where will he get the money from - from the comapny and paying higher rate tax on the dividend. Also this could compromise the company's status as a trading company.

Thanks (0)
avatar
By pauljohnston
25th Oct 2010 11:24

how a share buy back to release the cash

At present there is a £10k CGT exemption.  My initial thought is a S419 loan paid back annually by a further buy back of shares.  Alternatively assuming there are sufficient reservers a take a CGT hit on a one-off buy back.  Others here have given some good advice so may be a basket of ideas may be the way forward.  Make sure you are well paid for any advice

Thanks (0)
avatar
By Chris Floyd
25th Oct 2010 11:34

Borrow against the let properties

Assuming the current home has equity of at least £50K, then your client could borrow from the company against this property (thus releasing equity from this property to use to fund new house).  As this loan is for a qualifying purpose (to fund rental property) there is no BIK charge (alternitivly pay the offical rate of interest to the company and then claim interest as an expense aganist rent).

The company will still need to pay 25% over to HMRC under s455 CTA 2010 (old s419 tax), which it will get back when the loan is repaid.

 

Thanks (0)
avatar
By hallsi
25th Oct 2010 11:34

Better to rent it to the company and possibly sell the investmen

You could set up a rental agreement between the client and his company to rent office space to the company (at a reasonable market rent).  this is taxable income in the hands of the client but he can offset mortgage interest, repairs etc against this.  unlikely to be a CGT impact given only part of the house is let. 

You could also advise client to sell the investment property to his company.  this would allow him to effectively remove the equity from the property.  there could be a CGT charge however on the transfer.  things to consider here are:

For the transfer:

In the long term this will improve the 'health' of the balance sheet because you are introducing an appreciating asset, which has equity in it.  This will undoubtedly improve the company's financial position should for instance you need bank lending or outside funding (eg asset leasing) for growth.  If you don't need to withdraw the full amount of funds immediately, you could perhaps take some additional shares.  When you come to sell the company, the higher the cost of your shares in the company, the more Capital Gains Tax you could potentially save.The company is likely to pay lower Corporation Tax (20% from April 2011) on the rental profits than you will pay as a Higher Rate Tax payer (40%).You can effectively take a tax free withdrawal from the company equivalent to the equity in the property at the date of transfer.When the property is sold, the company pays just 20% (from April 2011) Capital Gains Tax on the profit whereas you as an individual pays 18% and probably mostly 28%.Rental losses can be set against trading profits of the company.

Against the transfer:

If you or a 'connected person' live in the property, then there will be a benefit in kind tax charge. In the short term, there will be little improvement in the health of the balance sheet because the introduction of this asset will be represented by a liability (commercial mortgage) and probably a cash withdrawal or credit to Director's Loan Account from the company equivalent to the equity in the property.Owning property through a company can lead to a possible double tax charge.  If the property value increases significantly, then when the company comes to sell the property it will pay Corporation Tax (20% from April 2011).  However, to extract the funds from the company, you may have to pay tax again to do this depending how quickly and how much you need to withdraw the funds.The interest on a commercial mortgage may be higher than that for a personal buy to let mortgage.  The commercial mortgage is always going to be +% over the bank's base rate, which may make it fairly cheap right now but could make the differential wider when rates increase to say 5+%.If your company fails and goes into liquidation, you will lose the property as it will be sold to pay off creditors of the company.In terms of Entrepreneur's Relief (which is a tax relief given against Capital Gains Tax), this is dependent upon the company assets not being diluted by not more 20% of non-trading assets.  If this is the case then any sale of shares will result in Capital Gains Tax of 18% (and possibly 28%) and not 10%.The company is not entitled to a CGT Annual Exemption (currently worth approx £10k) and also not Lettings Exemption (currently worth up to £40k).There may be Stamp Duty Land Tax on the transfer at its current market value.

Thanks (0)
avatar
By Helen Stevens
25th Oct 2010 11:44

How would a share buy back work?

Hi. Interested to read the advice about a share buy back to release some surplus funds from the company. How would that work exactly? Is that something a small company could do for themselves with a bit of careful paperwork, or would solicitors and all sorts need to be involved? Many thanks for any help.

Thanks (0)
avatar
By Malcolm Veall
25th Oct 2010 11:45

lots of options

Spayne,  as you can see from the many responses, from a number of contributors who know what they are talking about, there are many possible variations.  There are pros & cons of every variation.

I would strongly suggest that you:

- give your advice to the client in a way that spells out the fact that there is no right answer

- that spells out the various tax consequences of each variation

- that makes clear that the choice is his - there is no "right" answer

 

If you are in doubt do the research on the variations & take advice from either a CTA or one of the tax consulatancy helpline.

Thanks (0)
avatar
By andrewlaw2611
25th Oct 2010 11:56

Think wider...?

Let's assume that you are happy for the company to have rental property and that is not of sufficient scale to upset the trading staus of the company.

The director wants to keep his existing properties and buy something new for himself. Presumably the use of the company funds is just part of his overall funding so that he doesn't need quite as much mortgage. If this is the case you might like to think about the company buying a share in the old home. This needs to be at market value but would presumably be exempt CGT as PPR in the hands of the director. The company would then be entitled to a share of the rent but so long as everything is kept on commercial terms there should be no problem. You would need to look at the cash flows in this situation to make sure the mortgage repayments can be funded by the director with a reduced share in the rent. You would also have to advise the current lender of the joint ownership and deal with thgeir security issues.

So not a quick fix but might be workable in the right cirtcumstances?

 

Thanks (0)
By sue scherzo
25th Oct 2010 12:22

company buying house- good idea?

Not too bright, why would any client want to have this sort of complication?

If your tax knowledge is not too secure do seek appropriate advice from a CTA, this is a dangerous area; and make sure your PI will cover you should you get it wrong!

Thanks (0)
Nigel Harris
By Nigel Harris
25th Oct 2010 13:10

Yes, keep it simple

I'm with Sue on this. Keep it simple, pay him a dividend and let him keep all the property stuff outside the company.

Involving the company has huge potential to come back and bite him later, it makes property dealing very difficult in future. What if he decides to move back into the previous house and let the new one, etc etc?

Thanks (0)
avatar
By sallycox
25th Oct 2010 13:54

Use of Company Funds to fund house for director

Oh dear, there seem to be huge gaps in your knowledge.

Are you sure you should be advising your client?

Perhaps he/she/the company should be asking advice from someone suitably qualified to advise. This does not seem to be you.

Thanks (0)
By cfield
25th Oct 2010 13:59

ESC C16

Another option no one has mentioned is to dissolve the company under ESC C16 and claim Entrepreneurs Relief. The £50k retained profits would only be taxed at 10% (rather then 25% on a dividend) plus he would be able to offset his annual exemption and maybe that of his wife if he gives her some of the shares first (although she would not get the ER unless she had owned the shares for at least a year and was an officer or employee).

Presumably he wishes to continue his business, so he would do that as a sole trader for a while and incorporate again after a couple of years. Possible pitfalls - make sure ER is available or else he will end up paying 28% instead of 10%. In particular, ensure the £50k represents trading assets (shouldn't be a problem at that amount I'd have thought). Also, make sure he doesn't pay too much tax or NI as a sole trader for the next couple of years or he will lose the benefit of the 10% tax rate.

I agree with other posters about the dangers of selling your house to your company. Not worth it I'd have thought for the sake of £50k. He wouldn't save enough tax on this to make it a worthwhile option given the risks involved.

Other than that, I think the loan route is best with the client paying 4% interest to the company and charging rent for a home office sufficient to cover the interest and a fair share of household bills (assuming he does some work there of course!).

Chris

Thanks (0)
avatar
By pauljohnston
25th Oct 2010 14:19

Share buy back paperwork not impossible

contact [email protected] 0161 796 6090.  But firtly consider all the excellent advice above.  You want to keep this client  so make it simple for you in the future as well as for the client now.

Thanks (0)