Problems with ltd co buying a flat?

Problems with ltd co buying a flat?

Didn't find your answer?

Background: trading company has built up substantial cash. Sole unmarried director/shareholder does not want to withdraw cash due to high personal tax rate. Client’s idea is to invest in a flat close to his rented office. Assume that issues with entrepreneurs relief do not arise as there will be no rental income. Also assume that the flat’s value is less than £2m so that 15% SDLT and the annual SDLT charge do not apply.

I have already pointed out to the client that if he stays overnight in the flat, then there is a risk of a large benefit in kind. Client’s response: I won’t stay overnight, I will use the flat as a work place for admin, and as somewhere to invest my cash that should produce a better return long-term than a deposit a/c.

Apart from ensuring that there are no beds in the flat, what other steps should be taken to ensure that (i)all the running costs are allowable and (ii)no accommodation bik arises? I don’t know if it is practical for my client to see his clients at the flat, though obviously this would help the case.

I will also have to point out to the client the double tax arising on a sale or solvent liquidation of the company. In other words, tax on the capital gain on the flat and then a second lot of tax when the net proceeds are distributed.

I wish the client would just accept either low interest rates on the cash OR accept tax on withdrawal as dividends! Much simpler and more certain of outcome.

Replies (5)

Please login or register to join the discussion.

avatar
By awoodj
26th Apr 2013 11:04

Why does he think there is no issue with ER??

Doing something like this can very well make it look like you are conducting investment and impact on trading status (given his motivation and reasoning described it sounds exactly like investment activity) I would look very carefully at whether if this would prevent ER in the future as it might be a very poor "investment" if it does. Also might be a bit late given already purchased. It will also complicate a sale of the business as it will be an asset that anyone buying will likely not want even if it caused no other issues.

Thanks (0)
avatar
By Chris Smail
26th Apr 2013 11:40

Stick it in a pension and invest in business property?

If he wants to get into property without withdrawing the money as dividend or salary.

But not residential.

Get proper detailed advice before he commits

 

Chris Smail

www.langer.co.uk

Thanks (0)
avatar
By King_Maker
26th Apr 2013 12:39

Does it have planning permission for office use?

Will he be paying Business Rates?

Thanks (0)
Replying to Tax Dragon:
Red Leader
By Red Leader
29th Apr 2013 11:09

thanks for the replies

King_Maker: the flat has not yet been purchased but to answer your questions: I doubt whether there is specific planning permission for an office and I don't expect business rates will arise unless the local council gets involved.

Chris Smail: I don't think enough could be contributed within limits to match the price of the flat.

Thanks (0)
avatar
By awoodj
29th Apr 2013 11:36

Another suggestion

If he can get a suitable commerial space with possibility to turn into a Flat(s) further down the line it might turn out a better investment. Planning is being opened up in this area so might have a better chance of conversion than in the past. Only thing would be his initial use as commercial might weaken his argument for residential conversion. There are some good tax saving possilities for Commercial to residential and in the mean time buying something that is office space probably gets round the problem of him being seen as being involved in investment activities. It would also give him the chance to apply for planning at his leisure and then possibly even just sell on with planning for an increased value later down the line. also All that said it would probably be best if his initial "intention" was just to buy it as an office.

Just some ideas to think about and he does need to be pretty careful of what he does if he thinks at some point he may be able to sell the company with a significant ER qualifying gain as if any property investment scuppers that it was probably not a very good "investment" even if it made him some money in it's own right.

Thanks (0)