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FRS105 - Investment Property

Accounting for an investment property when mortgage is in Directors name

How should I account for an investment property where the Ltd company is the beneficial owner but the mortgage is the Directors personal liability?

The income and expenses will be on the company P&L and therefore it fits the recognition of a fixed asset but there is no corresponding liability (mortgage) and no cash has changed hands. 

Its a micro entity and reporting under FRS105. 

My thoughts are to;

  1. recognise the fixed asset at cost to the company which is nil; or
  2. recognise at the cost of purchase by the director and include some kind of reserves adjustment

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24th Sep 2018 00:49

My first question would be dose the bank who mortgaged the property know about the situation? I doubt they would agree to finance such a setup. You would have to transfer to a buy to let mortgage in the company name to report under FRS 105.

So my view is you should be reporting the income etc. On the personal tax return.

I am sure other people will correct me if i am wrong.

Thanks (3)
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By sr85
to In a Daze
24th Sep 2018 08:19

Thanks for your response. Those were my first thoughts so I have queried with the client. The property is legally owned by the Director which is why the lender is ok with it.

From what I have read in various sources the taxable party is based on the beneficial owner, in this case the company. Therefore, I’m comfortable with the tax liability being with the company.

My question is then more around the financial reporting of the property.

Although keeping it as a personal rental income would avoid the financial reporting query, the company has become the beneficial owner and therefore should report the income and expenses.

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to sr85
24th Sep 2018 09:10

sr85 wrote:

Thanks for your response. Those were my first thoughts so I have queried with the client. The property is legally owned by the Director which is why the lender is ok with it.

From what I have read in various sources the taxable party is based on the beneficial owner, in this case the company. Therefore, I’m comfortable with the tax liability being with the company.

My question is then more around the financial reporting of the property.

Although keeping it as a personal rental income would avoid the financial reporting query, the company has become the beneficial owner and therefore should report the income and expenses.

The debt is the director's not the company's even if the beneficial ownership of the property is with the company. Therefore, in my opinion the company is discharging a debt of the director which causes all sorts of issues especially around the deductibility of mortgage interest for the company...

The double entry is probably (depending on how you incorporated the property in to the company) be DR investment CR Director's loan - the outstanding mortgage shouldn't appear on the balance sheet.

Also, ask your client if he has paid the SDLT and CGT on the transfer of the property to the limited company.

Thanks (0)
24th Sep 2018 08:59

If the property is legally owned by the director, how has the company acquired beneficial ownership? By the director executing a declaration of trust?

Thanks (3)
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By sr85
to johngroganjga
24th Sep 2018 11:26

There is no declaration of trust. I’ve read elsewhere that although this would be an official stamp of ownership it is not a definitive requirement and beneficial ownership can be implied by the reality of the company running the day to day operations of the property rental. I know I shouldn’t believe everything I read on the internet but this seems plausible.

I’m also trying to be consistent with the previous accountants treatment which seems to have been to report the revenues through the company. I’m waiting on additional information from them on how they were treating it.

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to sr85
24th Sep 2018 12:13

sr85 wrote:

There is no declaration of trust. I’ve read elsewhere that although this would be an official stamp of ownership it is not a definitive requirement and beneficial ownership can be implied by the reality of the company running the day to day operations of the property rental. I know I shouldn’t believe everything I read on the internet but this seems plausible.

Plausible? Really? So no legal documents, no nothing. Just start declaring your income as the company's and job done, lots of tax saved.

Income from property isn't "the company running the day to day operations", it's the rent paid under the lease. The company may well be acting as managing agent but that doesn't entitle the company to retain the entire income or report the property as a company asset.

sr85 wrote:

I’m also trying to be consistent with the previous accountants treatment which seems to have been to report the revenues through the company.

I think your concern should be doing things right, not being consistently wrong.

Thanks (2)
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By sr85
to Accountant A
24th Sep 2018 13:42

I am obviously concerned with doing things right which is why I am asking for advice from fellow professionals. The prior accountants were a large firm with many more years experience whilst this is my first client dealing with property. Therefore I believe being consistent is likely also going to be right but I am questioning the treatment.

If a company offers to manage your property for you in return for keeping all of the profits then I admit it’s a pretty terrible deal for the property owner but not impossible.

Thanks (0)
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to sr85
24th Sep 2018 14:22

What ever agreement is in place there should be some paperwork work to back it up.

If you have no such paperwork you must report on the directors personal tax return in my opinion.

Thanks (1)
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to sr85
24th Sep 2018 17:52

sr85 wrote:

If a company offers to manage your property for you in return for keeping all of the profits then I admit it’s a pretty terrible deal for the property owner but not impossible.

Not an arm's length transaction with a connected company, either.

Thanks (0)
By trecar
to sr85
26th Sep 2018 11:12

I take the inference that size suggests greater resources and a greater likelihood of getting it right but, a word of caution. I can still remember from my training, many many moons ago, where we had to review the accounts of Plcs to find the errors in their published accounts and how frequently we found them. What applies to accounts can also apply to tax etc.

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24th Sep 2018 14:37

I came across this a few years back where a solicitor client needed to avoid, for the time being, the transfer of legal ownership and so established a third party as the beneficial owner (or equitable owner as she called it).

It's perfectly OK to have the split of legal and beneficial ownership in this way but, from memory, there was a simple document, the equivalent of a declaration of trust, that existed to evidence the arrangement.

Thanks (1)
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By frankfx
24th Sep 2018 14:43

Land law and property ownership is underpinned by written documentation not oral understandings and agreements.

Title and ownership must be in writing.

I repeat WRITTEN.

Check the land registry and the requirements thereto.

Somewhat like a WILL to be valid , certain legal formalities are required to convey legal title to land.

Internet research and even forums like this are not the place to reliably check the legal requirements behind an asset worth £'000s.

If there was a costly dispute later on , placing reliance on the man at the bar down the digital pub wouldn't be a pint of Watneys........... long memory eh?

Ask your client for all the written documentation behind and leading to the current 'ownership' status.

Was that paperwork provided to former accountants, when they required / requested it ?

If yes, then it probably held in one digital folder and is readily accessible.

Please inform us on AWEB the outcome of your enquiries...we could be walking the same path.

Thanks (2)
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By sr85
to frankfx
24th Sep 2018 22:48

Great point about the internet research. Although I think even paid for advice would probably differ!

I have checked the title deed and the property is in the directors name.

It is not what the client wanted/expected to happen but for the avoidance of doubt we will report on the self assessment. The tax implication turns out to be minimal.

Thanks all for you inputs.

Thanks (0)
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to sr85
24th Sep 2018 23:04

sr85 wrote:

Great point about the internet research. Although I think even paid for advice would probably differ!

I have checked the title deed and the property is in the directors name.

It is not what the client wanted/expected to happen but for the avoidance of doubt we will report on the self assessment. The tax implication turns out to be minimal.

Thanks all for you inputs.

How are you planning to deal with previous years? From what you wrote, I took it that the income had been reported as the company's and not the individual's?

Thanks (0)
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By aayzed
27th Sep 2018 09:33

there was a scheme for transferring beneficial interest in property partnership to a limited company in return for new shares. No stamp duty on transfer. Cant remember the details but this may be what happened here?

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27th Sep 2018 13:23

Hi I have a similar question, what if the Director of a small company remortgages his joint mortgage with his wife to raise capital to by a building to convert to flats.
Should the £100000 raised be capital injection to DLA or should 50% go to loans and 50% DLA or £100,000 put to Loans?
At the point of the loan his DLA was £30000 at the present the companys is showing £70000 owed to Director,what is the best way for tax purposes to treat this situation Please?

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