loaning a rental property to a company

loaning a rental property to a company

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Is there any legislation stopping someone buying a property loaning it to a company, using the property as a rental property and billing the rent from the company. Therefore, no personal income to declare. All income reported through the company. At a later date dividend declared to shareholders to remove all profit made over the years.

Potential problems I see

Ownership of property is with individual. Therefore could hmrc argue that income should be reported by the individual rather than the company.

Replies (10)

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By johngroganjga
17th May 2013 12:55

Can't see any problem with 

Can't see any problem with  this provided individual leases property to company at peppercorn rent (properly executed lease drafted by solicitors) and company is only party to sub-lease to end users (i.e. individual not mentioned in sub-lease).

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By andy4151
17th May 2013 13:17

Would pepper corn rent between individual and company need to be charged, would it be possible to loan it for free?

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By johngroganjga
17th May 2013 13:28

A peppercorn rent means next to nothing (say £1 per annum).  Under English law there has to be consideration passing both ways for the contract to be legally binding - see http://en.wikipedia.org/wiki/Peppercorn_(legal). So that is as near to rent free as it is possible to get.

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By andy4151
17th May 2013 13:37

Sounds good. Thanks for your help

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By uktaxadvisors.com
17th May 2013 14:44

Not sure??????????????

You are in effect granting a lease to a company and the company is not paying anything - there are a number of “potential” tax implications. I dont think its as simple as stated above. Issues to deal with include a disposal between connected persons resulting in that disposal being measured at market value for CGT purposes; SDLT, deemed income etc.

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By User deleted
17th May 2013 15:00

What disposal?

We're talking about a lease, not a sale, to the company.

I've heard it said that HMRC might try and argue that the insertion of the company is an artificial step and disregard it. I've yet to hear anyone say that HMRC have actually taken that approach and they certainly haven't with any of our clients that have set up arrangements of this type. (Not that many now, but there were quite a few when the £10k 0% CT band was introduced. My view is that with the level of most rentals the end no longer justifies the means. but it may be worth it with larger commercial premises and/or substantial property portfolios)

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Replying to C.Y.Nical:
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By uktaxadvisors.com
17th May 2013 15:22

disposal

BKD wrote:

We're talking about a lease, not a sale, to the company.

I've heard it said that HMRC might try and argue that the insertion of the company is an artificial step and disregard it. I've yet to hear anyone say that HMRC have actually taken that approach and they certainly haven't with any of our clients that have set up arrangements of this type. (Not that many now, but there were quite a few when the £10k 0% CT band was introduced. My view is that with the level of most rentals the end no longer justifies the means. but it may be worth it with larger commercial premises and/or substantial property portfolios)

The grant of lease may have both income tax and capital gains tax implications depending on the length and terms of the lease.

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By User deleted
17th May 2013 15:52

Granted

Yes there are potential tax implications. I was too liberal with my unstated assumptions, including:

It is unlikely that the property owner is going to charge a premium in such circumstances

I don't see many cases of such arrangements where the NPV of the rents exceeds the relevant threshold

 

But you are correct - there are potential implications

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By Steve Kesby
17th May 2013 17:59

I don't think they're just potential implications

As a matter of land law (in Engalnd, Wales and Northern Ireland), a person can't grant an interest in land that is greater than the interest that they hold. So either:

the company is just acting as the individual's agent, meaning that the income is taxable on the individual, orthe company must have been granted an interest in the land that is at least equal to the grant that it makes on the sublease.

In the latter case, if no rent is paid by the company to the individual, then:

the individual has made a CGT part disposal on the deemed premium (see CG70825), andthere's an income tax charge on the individual under Ss282/283 ITTOIA 2005, andthere's a market value premium for SDLT purposes under S. 53 FA 2003.

It may be different in Scotland though.

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By User deleted
17th May 2013 18:56

Interesting points, Steve

I confess to not knowing much about English land law, but I had always understood (mistakenly perhaps) that the requirement that the interest in the granter's hands must be at least equal to that in the grantee's was a reference to the nature of the interest rather than a financial constraint. ie the tenant could not grant a 10-year lease out of a 5-year head lease. As far as I was aware (again, I'm happy to be corrected) there is no restriction on the amount of rent that the tenant may charge under the sub-lease.

As for the deemed premium, in the case of a residential property it is likely to be small. I've never seen HMRC take the point - though concede that strictly, they could.

As I noted above, in most such cases it is unlikely that MV of premium would exceed SDLT threshold.

And I thought that s282 dealt with the assignment of short leases.

The reason I said there were potential implications is simply because I have never seen HMRC take any action  - but all such cases I've been involved with were relatively small and possibly HMRC just couldn't be bothered.

 

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