My wife and I have been fortunate to receive a substantial amount of money and are interested in the property business. We both have jobs but we intend to quit our jobs and concentrate on running the property business as Directors. We have identified tenanted properties we intend to purchase. The properties are already furnished. We intend to go and see a specialist tax advisor in the next weeks but just wondered if anyone could help with some of the following issues.
- Which is the best legal structure for us partnership or Limited company
- What is the best capital structure for us, should we form a Limited company and loan the company the money or should we invest in the company as equity. What are the benefits of each for tax efficiency.
- Are we entitled to any reliefs for depreciation of furniture. If we get salaries or dividends from the company are we entitled to pay National insurance.
Please help us as we need some heads up before we see the tax advisor. Thanks Chiko
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Replies (10)
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This is a big subject
Generally speaking you will be best with a limited company if you intend to borrow to expand a portfolio quickly AND you intend to hold on to the properties for the very long term (ie until you die). Otherwise just good old fashioned joint ownership is to be preferred. But I stress that is very much a generalisation. There are pluses and minuses on both sides and a good adviser wil need to know a variety of things before you can make a choice.
If you go the limited company route you would normally have a minimal amount of share capital and loan the funds to the company.
Salaries will involve you paying national insurance, but the opportunity to pay salaries from a property investment business are limited and only available in the limited company scenario. Dividends do not attract NI.
Best of luck with your venture.
Where are you based
I would happily advise as do a lot of this type of thing and have my own properties.
Slightly different question.....
Slightly different take on this......I own a number of properties and am considering transferring them to a limited company. SDLT and CGT issues apart, I have received advice that it is OK to thinly capitalise the company and finance the company's acquisition of the properties with a loan from me. I then drawdown the loan using net income from the rents effectively resulting in 20% CT rate only as opposed to higher rate income tax. This obviously only lasts until I have exhausted the loan account. Is this sound advice or would HMRC seek to treat some/all of the loan account as capital and thus the loan drawdown as dividend?
adie...so for clarity....
You loan company £x
Company buys the property....using £X
The company then repay you £X....
The loan repayment is that....a repayment of a loan....not deductable against corp tax....unless you charge interest on it. But company pays only 20% corp tax on profit anyway....
But standard reason for using company is for it to retain the profit anyway (rather than distributing with potential higher rate tax charge) and reinvesting to build portfolio quickly.
(not sure what thin capitalisation means in this instance....but sounds like a bit of buzz word bingo by the person who was advising you....perhaps they would be better advised to put it in simple terms whilst pointing out any drawbacks/benefits)
thin capitalisation.....
Thanks. Basic structure (illustrative numbers) is as follows:-
Market value of properties £2m
I invest share capital of £1,000 and provide loan of £1.999m to finance the purchase from me.
Net rents £100,000
CT @ 20% = £20,000
After tax profit £80,000
Use after tax profit to pay off loan of £1.999m @ £80,000 pa = 25 years, i.e. effectively distributing the profit back to me but via loan repayment rather than by dividend.
Alternative is to leave things as they are and incur income tax at:-
£8,105 personal allowance @ 0%
next £32,010 @ 20%
next £39,885 @ 40%
Total tax £30,356 = effective rate of 30.36%.
Saving = £10,356 pa for 25 years assuming all things remain the same. Thereafter, profits would either be retained or distributed by dividend.
seems a little too simplistic....
apart from CGT and SDLT which whilst we would like to ignore will have a significant consequence on a property portoflio worth £2mil, by using a letting management company instead you would reduce the taxable income by 15-20k per year without any of the issues of cgt/sdlt.
Still not sure what you are trying to do with your loan....but of course the 80k would be 'tax free' - its just a loan repayment - perhaps what 'we' shouldn't ignore is the fact that you have £2mil tied up for 25 years - albeit on a reducing basis (repaid at 4% per year).....
CGT/SDLT
CGT should not be an issue as the properties have only been acquired recently hence will transfer to the company at the same or only marginally higher values. Agreed re SDLT.
Using a letting management company would reduce taxable income but, at the moment, I need the income so would end up paying the income tax anyway on distribution of the management company's profit!
Tying up the value is not an issue - strategy is to hold for life and gradually pass down to the kids. The aim is simply to exchange income tax rates for lower CT rate for as long as it takes for the loan to be repaid.
the loan element
re-reading your response, I think you have misunderstood......I would not be tying up £2m of cash in the company. The loan is a book entry only in the company's accounts at the point of purchase, i.e. I pay the company £1,000 for the share capital, and it acquires the properties worth £2m from me by using the £1,000 cash and acknowledging a debt to me for the balance of £1.999m. The company then uses its net income from the rents to reduce its debt to me.
Double entry:-
Dr Cash £1,000
Cr Share Capital £1,000
Dr Property value £2m
Cr Directors Loan account £1.999m
Cr Cash £1,000
Net of tax rents then used to pay off the directors loan.