I have a potential client who owns several buy-to-let properties. He personally owns them but charges a peppercorn rent to a limited company. The limited company is responsible for all associated expenditure e.g. maintenance and improvements. As a reasonably new business it has not yet generated enough profits to declare a dividend but that is the way he intends to withdraw cash. Is this practice OK?
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He must operate his BTL business is a strange way to be so concerned about legal action from tenants.
Why peppercorn?
Why doesn't he charge a higher rent, as a tax efficient way of extracting the company's profits?
Sounds as if the company is only breaking even so higher rents out of the company wouldn't appear to be tax efficient.
What are the terms of the lease?
Does the company have a formal lease? What are its terms?FRI? Watch out for capital items included in "repairs". HMRC can argue either that they constitute a benefit, or, more subtly, as a distribution under CTA 2010, s1000 1(B)
Lease Premium
I would suggest that the creation of a lease with a peppercorn rent is a market value capital disposal based on the lease premium which would have been charged had this been an arms length transaction.
And according to CGTM70825 HMRC agree with me.
Thanks
Flurry and PNL - couldn't believe it wouldn't have tax implications but interesting to see the legislation on this.