Property tax planning: Investor or dealer?
Lesley Stalker outlines the key considerations for property tax planning in the current framework and why should you ask clients if they are an investor or dealer.
Over the years, our advice when buying property has varied according to the client’s tax position and funding availability at the time. Should investment property be bought personally or through a company? This is not a clear-cut position, although the availability of taper relief on the disposal of commercial property has in recent years favoured the purchase of this type of property personally.
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Why not borrow the money from the company instead?
As you say, dividends are expensive now if you want to extract company profits to buy property, but there is another way. If you extract the funds as a loan, you could pay the company 4% interest to avoid a benefit in kind and claim that as an allowable deduction against the rent, so your own tax is minimised. Of course, the company would have to pay tax on the interest but it's a lot cheaper than borrowing the money externally. This is normally a good idea if you buy business premises for your company, as the rent will then be deductible against corporation tax. Plus it is usually a good idea to keep property in your own name rather than put it through a trading company so there is no danger of losing it if the company ever goes bust! The only downside is 25% tax on a participator loan, but at least you would get this back one day when the property or business is sold, whereas with a dividend the money is gone for good.
Chris
Personal investment
Personal investment is difficult for directors/shareholders of small cash rich companies with couple of millions sitting in company bank account. If they withdraw this to invest personally, 50% tax rate comes in force (dividends at approximate 46%) and they lose literally half of funds in paying personal tax, no matter they invest in property with an intention to keep investment or act as a dealer to buy and make quick gains. In this case investment through a company appears to be a best option for both intentions........ Well... What can be disadvantage for a cash rich company to invest in properties? Specially it will have opportunities to offset rental losses against other profitable trading activities I.e legal services......