Property joint venture

Property joint venture

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We have received an inquiry from 2 married couples looking to set up a residential property lettings business as a limited company but where the properties are, or will be, privately owned by the couples. Their plan is to let the properties to the company and then the company will sublet to the tenants. The reason for holding the properties privately is that they have struggled to get any mortgage facilities for the new company as it has no trading history. Mortgages will be on an interest only basis and the rent paid by the company to the individuals will be just enough to cover the interest. All other transactions will go through the ltd co.

They are planning to use A & B share classes so that couple no. 1 has A shares and couple no. 2 has B shares. The shares will rank equally except for dividends and distributions. The properties may be purchased 50/50 by the couples or in varying proportions depending on available resources at any given time. If one couple buys a property in their joint names but the other couple is putting in half the deposit, a restriction will be lodged with the land registry to provide a degree of security. The couples, at the moment(!) clearly have excellent trust in each other.

Each property will be allocated for accounting purposes to classes A & B in proportion to the private ownership stakes, e.g. if a property is bought 75/25 then the P&L for that property would show 75% to class A and 25% to class B. The intention is to grow the business as a retirement vehicle; the couples are in their late 30s/early 40s.

There will be a shareholders agreement in place to record the arrangements and to attempt to deal with contingencies, problems and exit strategy. 

The individuals will declare the rent paid to them personally by the ltd co on their SA returns with the mortgage interest as a cost thereby giving a nil tax liability. The company will obviously be liable for CT on any profit that it makes. If dividends are paid, clearly these will be included on the recipients SA return as investment income. If any property is sold then any capital gain would be subject to CGT in the owners SA returns, allowing for the annual CGT exemption.  

Has anyone come across such an arrangement before? Are there any tax pitfalls they should be aware of?

Replies (4)

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By buttinski
23rd Jul 2013 14:20

Forgive me for asking but ......

why do they want to do any of this?  Is it simply to turn rental income into (deferred) dividend income?

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By anavrin
02nd Aug 2013 15:32

Retirement planning

They want to build a property business for the longer term as part of their retirement plans and to do it in a tax efficient manner. 

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By awoodj
02nd Aug 2013 17:15

Be wary on the mortgages

They will need to be careful the mortgage companies will allow this or that they at least chose one which will. Often the mortgage company wants to see a standard short assured tenancy as part of the process as they can regain possession more easily should you default. This type of arrangement will not be with the individual taking out the mortgage but between the company and the tenant, which may be an issue. Some of the less "box ticking" lenders may be ok with this but worth checking before assuming certain rates/products are available. On a tax perspective the main reason to want to do this is if the individuals are higher rate tax payers they can grow the money within the company based on 20% corporate tax rather than potentially higher individual rates. However when they want access to the money there is still the same problem if higher rate tax payers they will have to pay tax on the dividends they take. My experience is for the first couple of years they will show a tax loss so keep things simple and do it all in personal names then when you start incurring a personal tax liability and have used up carry forward losses then go with the company and leasing the properties approach they are suggesting. If they think they will show a profit from day one they are not putting enough through against revenue and all as Capital, at least in my opinion.

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By WhichTyler
02nd Aug 2013 17:33

Storing up trouble..

There will be a shareholders agreement in place to record the arrangements and to attempt to deal with contingencies, problems and exit strategy. 

I would be tempted to hold off any further work until this has been agreed. As they work through it they may think that the complexity of jointly owned property (in proportions that vary from propoerty to property) will be so complicated to untangle when one of them dies/goes into care/has an affair with the other one's wife/decides that now is the time to sell up that they don;t want to go ahead with the business at least in this structure.

If the company is jointly owned and just manages properties that are owned by one couple or the other (or indeed someone else, if they really want a business), then that's another matter (but still risky)...

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