Buying a Property with a Limited company with money LOANED from family

Buying a Property with a Limited company with...

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I am the owner and sole shareholder of a Limited company.

I will be buying a property for 70,000 using money loaned to the company via family members, the money will be intrest free as its a long term investment.

what i want to know is by laoning the money from family to buy the property, will this be classed as me as the director and sole shareholder as owning 70k worth of shares?

or does the 70k not count as my asset becuase the money is only loaned to the company,

basilcy i am shorterm unemployed and rent property with housing benifit help until i get another job.

i am allowed to have 16000k in savings or shares without loosing this benift, hence why i need to know if me being the sole owner of the limited company im going to be classed as having a 70k asset, even tho the money is borrowed.

Thanks

Replies (32)

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By johngroganjga
20th Jan 2014 08:30

Borrowing money does not increase your net assets or those of the company.

But be careful to keep a full written record of the loans so that you can prove that that was the source of the money if you should ever need to.  Ensure that the documentation clearly shows who the money is being lent to - the company or you personally.

As an aside, why are you using a company to buy property?  Have you taken advice on what is the best ownership structure for you to have?

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By bernard michael
20th Jan 2014 09:18

For clarification. You say "I

For clarification. You say "I will be buying a property" Do you mean the company. If so why not give each of the family members a charge over the property to protect their interest.This also reduces the perceived value of the property to just it's equity.

If YOU are buying the property using money lent to the companyy it is a totally different situation and you need to clarify to obtain further advice

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By johngroganjga
20th Jan 2014 09:27

Giving the lenders a charge does not alter the net assets of the company, and is not in the OP's interest to suggest if the lenders are prepared to provide their money without taking security.

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By Adam2222
21st Jan 2014 00:30

thanks for the replys

thank you so much for your reply, ill make myself more clear so you know how better to advise me,

 

I am the director and sole shareholder of the company and will be borrowing 70k from family members so the company can buy the property, the lenders dont need or want a charge on the property as we are all family and trust is not an issue plus putting a charge will just mean more paperwork and more legal expenses.

With my situation being out of work i am entitled to housing benifit for a place to live, i plan only on being on housing benifit for a short term as i hope to get a job after i become qualified for a possition ive been working towards.

to qualify for housing i must not have any Assets including savings or SHARES to the value of more than £16,000

hence why i need to know if by the company laoning 70k to purchase a property when im the only sharholder of the company, would this equal me having 70k worth of shares?

the loans would show on the balance sheet but would not be paid back until many many years.

Im wanting to set up the limited company asap so just need to clarify this info before doing so and dont have any spare money to pay for an accountant at the moment.

 

Thank you for you help.

 

 

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By Adam2222
21st Jan 2014 00:48

to add

also just to clairift what my plans are,

 

1. Open Limited company, myself as the sole director and shareholder

2. Borrow 70k from 4-5 different people to buy a property for the company.

3. Not pay back loan for years.

4. As the sole shareholder i dont want to be deemed as having 70k assets (becuase the money is borrowed)

 

 

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By cparker87
21st Jan 2014 01:14

It will look odd..
To present the facts as you state will certainly seem odd on any benefit application. Just what do the family members loaning £70k get out of this? You say it's a long term investment, but what is their return? If they receive interest, the company must tax it and pay HMRC. If they receive a premium on redemption then it too may be taxed. There are certainly implications for them.

I suppose that is by the by. In theory, if the Company is loaned money directly from Family members, that presents a loan. Net Assets will be nil and so your shares will remain at par value. However, given this is an investment, and the money received will be spent on a property, almost immediately your net assets is not equal to nil because of the nature of property. In that case, you will need to regularly assess the value of those shares, which are instrinsically linked to property value less loans repayable at appropriate times as required by the benefits office.

Assuming the loans are nt interest bearing and not paid back for years, and if, unfortunately, you do not obtain your new job, then in a couple of years you might be looking at a set of shares with reasonable value in them. That'll hit the benefit.

As an aside, what are you doing with the rental income in the meantime? If you extract it from the Company, that too may be income.

All a bit messy really.

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By johngroganjga
21st Jan 2014 07:42

You haven't answered the question about why you are buying this property through a company rather than directly in your own name.  That may well be a very bad idea.  To some extent that depends on what type of property it is and what it is going to be used for.

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Woolpit Gus
By nutwood
21st Jan 2014 08:14

Use of property?

OP hasn't mentioned what use the property will be put.  Is it for him to live in; to let out; to refurbish and sell on?

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By bernard michael
21st Jan 2014 09:05

If the value of the company after the property purchase is more than £16000. you wouldn't qualify. How much will the property cost??

You will receive housing benefit based partly on a rent payable so you would have to draw up a lease with the company. If asked by the Council to see  the agreement they may also ask about details of the company ownership. They will not be happy with your answers

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By bernard michael
21st Jan 2014 09:12

You haven't answered the question about why you are buying this property through a company rather than directly in your own name

I suspect it may be something to do with that chap in the pub again or is it a badly thought out idea to flim flam the local authority on housing benefits

 

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By johngroganjga
21st Jan 2014 09:17

On what we are told the value of the company immediately after the purchase of the property will clearly by £Nil (assuming the purchase of the property is an arm's length transaction at full market value) as the entire purchase price is being funded by loans to the company.  As time passes, any increase in the value of the property, less the latent tax thereon, will increase the value of the shares. 

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By Adam2222
21st Jan 2014 17:00

what im trying to archive

Thanks for the info,

 

The Property will be purchased under the company i am the director of for 70k

The comercial property will be rented out and rental income will be 600 per month,

I will not be living in the property or have any other relationship with its rental aspect.

I as the director will draw £150 per week as a directors wage to live on until further notice, while unemployed so i dont have to claim doll.

The company will make 0 profit throughout the year while im paying myslef the 150 per week

No need to concern what my family will gain out of this investment thats not important in this question. the property will not be sold for years. lets just say my famility are doing me a favor for now.

 

All i need to make sure is when purchasing the property as the director of the company and with no other shareholders other than myself, that i will not be classified as having any assets.

if there is a better way to purchase please let me know,

 

Kind regards

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By johngroganjga
21st Jan 2014 19:26

A better way to purchase is to do it in your own name rather than through a company. That avoids the cost (employing accountants to prepare annual accounts etc.) of running a company and the potential double tax charge if the property is sold and you want to extract the proceeds from the company.

EDIT And don't assume that your “wages” will be an allowable deduction from the rent for the purposes of calculating the company's corporation tax liability. Using a company for this is a bad idea all round. Who told you it was a good idea?

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Replying to Technica:
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By Richieinspain
21st Jan 2014 22:24

Double tax charge

Hi, 

Just out of interest here, are you referring to potential profit on disposal of the house?  This would go to the P&L and be taxed at 20%.  I thought there would be no further tax charge if say he took a dividend from his company assuming he is a lower rate tax payer?

 

Thanks 

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Replying to taxinfo:
By johngroganjga
22nd Jan 2014 08:41

Double tax charge

Richieinspain wrote:

Just out of interest here, are you referring to potential profit on disposal of the house?  This would go to the P&L and be taxed at 20%.  I thought there would be no further tax charge if say he took a dividend from his company assuming he is a lower rate tax payer?

Yes of course it all depends on the amounts and whether any withdrawals from the company are income or capital.

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By Adam2222
21st Jan 2014 23:18

I cant have the property in my name personaly thats not an option as then i canot afford to live anywhere while unemployed,

 

The property NEEDS to be in a Company name so no other option is available

 

just out of intrest why would managing directors wage not be offsettable against rental income?

 

for agrument sake the property is never going to be sold so i dont need any advice on future disposal tax.

 

my main plans are, be the director of the company that owns a 70k value property from borrowed money, rent would be 7800 pa. i will be paying myselg 7800 pa as a wage as i have no other income. the company will make 0 profit after paying my wage.

please let me know what pitfalls i may face with this, but please dont mention problems i may face when selling the property as its never going to be sold.

 

thanks

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By petersaxton
22nd Jan 2014 04:55

It looks like

he wants the company to charge him rent so he can get housing benefit from the state.

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By johngroganjga
22nd Jan 2014 07:47

If you would explain why it's not an option for the property to be in your own name we would understand better what you are trying to achieve. Up to now it's a mystery and it's difficult to advise.

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By bernard michael
22nd Jan 2014 09:05

My summary of the situation is:-

1. He is buying  a commercial property in the ltd co on borrowed money. Initial co value therefore NIL. Doens't effect the housing benefit

2. He will not be charged rent by the company  therefore it doesn't effect his housing benefit

3. His income is £7800 per annum, which I assume equates with the rent chargeable by the company and will enable him to claim other benefits eg Working Tax Credits 

Perhaps the OP will confirm the above which should end the query

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By johngroganjga
22nd Jan 2014 09:15

Yes that's my understanding of what the OP is saying but his idea that he can withdraw the entirety of the company's gross income and spend it as he pleases without tax getting in the way may well be flawed.  We will be able to help him better if he will explain why he is intent on using a company for this, which seems to serve no purpose and to bring with it costs and risks that he would be better off without.

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By bernard michael
22nd Jan 2014 09:23

I suspect it's because he doesn't want to be seen to be the owner of a £70000 property as he would lose his housing benefit

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By johngroganjga
22nd Jan 2014 09:31

Well if that's the case he'll no doubt confirm.  It makes no sense otherwise.

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By petersaxton
22nd Jan 2014 09:38

Bankrupt

Maybe he's bankrupt?

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By Adam2222
22nd Jan 2014 23:51

replys

HI all let me verify your inputs,

 

First of all i personaly will not be living in the property in question whatsoever it is a comercial property that will be let out as a shop and flat,

Secondly i dont own the property, and am not trying to hide this fact by doing it this way.

 

I lost my job last year and recive a small amount of housing benifit to live in a rented property,

i do not want to claim job seekers allowence as i pride myself in getting myself out of unemployment as quick as possible,

i will be a paid director as i will be organising and doing some repairs and maintainance aswell as finding tenents and collecting rent for the business.

Becuase im not earning a wage my family are trying to help me by giving me this roll/job, but they are not going to if its not tax deductable from profits.

Becuase the property is such a bargain and i did the deal with the seller for my family and saved them £££, My family are willing to help support me with this wage until further notice.

I would like to take the maximum i can from what the company is making, as my wage.

Afterall its not asif im earning money elsewhere and everyone else paid in a normal job have a tax free allowence of 10k a year, but i know the cercumstances are different when its a company set up like this, hence why i need help.

I am not trying to rip off local housing for benifit, but by me having this directors roll paying the amount i want i would qualify for working tax credits just like bernard posted, as i do have a child to feed aswell.

but its down to how much im allowed to take as a wage as a director without it looking iffy to HMRC.

 

Just to add i cannot own the property in my name becuase i have debts at the moment and if i become out of work for a long period this asset would work against me in many ways that i would end up getting a charge on the property, for arguments sake lets just say im bankrupt (im not) so no matter what, the property can not be owned by me or be deemed as my asset. we are still undecided as to if or not each familty member are going to be shareholders or just loan the company the money, we need to know the best options.

Family are putting money into this property becuase the return on savings at the moment is awful as you are aware.

they will start to benifit when i stop taking a wage.

 

 

 

 

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Stepurhan
By stepurhan
23rd Jan 2014 08:17

Property ownership

The property can be owned by you. You just don't want it to because

it will be an asset your creditors can put a charge on to recover monies owed to themyou wouldn't have the director's salary to qualify you for tax creditsyou probably wouldn't be entitled to other benefits due to having a valuable assetyour family won't just give you the money you need while unemployed, you have to receive it in a way that reduces tax bills

Have I missed anything?

Other people in paid employment get £10,000 tax-free personal allowance because they are working in jobs that pay them at least that much. That is not an argument to say you should be entitled to receive £10,000 for a vague job that might not even be worth that, in an artificial arrangement set up in a way solely to benefit you and your family whilst reducing tax paid.

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By petersaxton
23rd Jan 2014 09:03

An example of

benefits culture!

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By Adam2222
23rd Jan 2014 15:21

ill save you all the bother and give up on this topic. you obviously have an issue with this and are all jumping on the band wagon trying to make me look bad.

Put yourself in my possition. you come from a decent background and have worked and paid tax all of your life in normal jobs.

Things take a turn for the worse and you loose your income and have to reslove to going to the job centre to basicly beg for 70quid a week.

As someone that likes to keep his pride by not doing this i contact my parents who are very close with family issues and ask if they could help me out. I tell them i can make there savings work much much harder for them by putting it into property. through my contacts i found them an incredible deal that would give them a massive return of 7800 per year from a 67000 outlay. they are very very happy with this as you can imagine. in return they said they would help me by employing me as the company director giving me the hours i needed to qualify for tax credits so i atleast did not need to beg for money at the doll office. but they wanted to offset these wages against the rental income if possible. Im sure if sny of you guys here were in the same possition you would do the same as it makes no difference to the taxpayer if im employed by parents or anothrt employee. maybe i should have made all this very clear from the first post but i wanted to try and keep it simple

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Replying to atleastisoundknowledgable...:
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By User deleted
23rd Jan 2014 15:50

Negative retained earnings

From what i can tell, the company will be lossmaking from day one - even if we assume it is let every month in the year.

This is without factoring in Repairs/Legal fees/Accountancy/Landlords insurance/Rates on [potentially] vacant premises.

Unless there is significant capital growth, enough to outweigh any negative retained earnings, the parents may not even get the whole of their £70k back, nevermind a return of 11% pa.

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By Adam2222
23rd Jan 2014 17:01

11% pa, would be made once ive finished being paid and have another job

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By [email protected]
23rd Jan 2014 17:39

Whilst I agree

that based on the OP description and situation it appears to be a bit of a 'tax dodge' is it illegal what the OP is proposing? Furthermore, why is he going to be a 100% shareholder himself? wouldn't it make more sense for the people who are 'loaning he company money' be the shareholders of the company. from the description, on day 1 the company will have no value (70K loan against 70K asset). rental income pays for wages. if he is not a director of the company but simply an employee, what legislation is there for HMRC to stop him being an employee. my thoughts are that it is on the grey side of ethical but tax mitigation is not illegal! see what starbucks are doing! ....

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By Adam2222
23rd Jan 2014 18:56

Thank you freelance, I dont need to be the 100% shareholder these are just options im considering, i can make my family even shareholders for what they put in to buy the property thats not an option but i did speak to an accountant and he sugested i could just open the company not involve family as shareholders and loan the money from them, he wasnt sure if or not this would class me as having a 70k asset as the company owner? obviosuly the simple route is shares to make 100% sure.

I know 1000s of people that put fake bills into buy to tet tax return to reduce tax this is almost seen as the norm. but what im sugesting is to just pay myself a wage, only problem is what HMRC would class as a fair wage for the company to be paying me without casuing audits and issues.

 

Thanks

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Replying to legerman:
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By cparker87
23rd Jan 2014 21:21

Point you accountant to this thread

Adam2222 wrote:

Thank you freelance, I dont need to be the 100% shareholder these are just options im considering, i can make my family even shareholders for what they put in to buy the property thats not an option but i did speak to an accountant and he sugested i could just open the company not involve family as shareholders and loan the money from them, he wasnt sure if or not this would class me as having a 70k asset as the company owner? obviosuly the simple route is shares to make 100% sure.

I know 1000s of people that put fake bills into buy to tet tax return to reduce tax this is almost seen as the norm. but what im sugesting is to just pay myself a wage, only problem is what HMRC would class as a fair wage for the company to be paying me without casuing audits and issues.

 

Thanks

Tell him he's pants. Give him this weblink and find yourself someone who can establish that 70 - 70 = 0.

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