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Tax treatment of personal expenditure in ltd co

Treatment of personal expenditure through limited company

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I have recently picked up a new client and have discovered that he has incurred £12k in renovating a property through his limited company business (the business is a plumbing business). The property has then been sold twelve months later. The property was purchased in the client's name rather than through the limited company.

Unless I am missing something, the £12k needs to be charged to the director's loan account and therefore disallowed in the corporation tax computation. The £12k is then treated as enhancement expenditure and added to the base cost for CGT.

What is nagging at me is that the client has now set up a limited company with a view to purchasing more property to renovate and sell, although none have been purchased yet. I am conscious that the first purchase and sale are now tainted by his future actions and the income treatment should possibly apply to the first sale.

Thoughts appreciated. 

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20th Apr 2019 09:24

It is always difficult for building trade people to argue that the purchase, refurb, sale wasn't a trade. You haven't provided enough detail here to the circumstances surrounding this first transaction. Was it his main home? What were his intentions at the time it was bought? Why was it sold?

Agree that there should be either a director's loan adjustment or perhaps a sale from the co to the director. At least the latter would show some acknowledgement of the trading element?

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to accountantccole
20th Apr 2019 09:53

Apologies, I should have made clear that this isn't his main residence.

Original intention was to renovate and rent out the property but intentions changed during the renovations to preferring a sale

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to Kbab8mjg
20th Apr 2019 10:03

"Original intention was to renovate and rent out the property but intentions changed during the renovations to preferring a sale"

That's up there with "the dog ate my homework" as an excuse. HMRC will have heard that thousands of times.

The other point is that the £12k of renovations might well not be allowable as enhancement expenditure for CGT. If it's just redecoration and replacing existing items such as kitches, bathrooms etc then probably not, but it all turns on the facts of the case.

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to Cloudcounter
20th Apr 2019 10:30

I completely agree that it is a flimsy argument and not one that I subscribe to at all.

The bulk of the works related to new features to the property rather than replacing old items, so I am comfortable that it is enhancement expenditure.

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to Kbab8mjg
20th Apr 2019 10:11

Technically, you should value the property at the date their intention changed from rental to sale... how you do that in practice I wouldn't know.

As for the expenses going through the limited company, what you suggest sounds okay but you haven't mentioned VAT? I presume they are not VAT registered.

There may also be scope to do it slightly more tax efficiently but I am not a fan of rewriting history.

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to Adam12345
20th Apr 2019 10:31

They are VAT registered but did not claim the VAT back on the purchases.

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By Matrix
20th Apr 2019 10:42

No you would not need to make any adjustment to the tax computation if the expenditure has been booked to the Director loan account.

You start with profit before tax, if the expenditure has not been deducted in the P&L then nothing to add back.

This is the second time this week that I have had to explain the basic tax comp, the lack of understanding on why an adjustment would or would not be needed is worrying.

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to Matrix
20th Apr 2019 11:42

The expenditure is currently in the P&L. Thankfully I am well aware that the director's loan account is a balance sheet item.

Maybe my original post could have made this clearer but I agree it is concerning if there are practitioners out there that do not understand this concept.

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to Matrix
20th Apr 2019 12:18

To be fair, I read “the £12k needs to be charged to the director's loan account and therefore disallowed in the corporation tax computation.” as “it’s currently in the P&L, but it should be in the DLA and therefore not deductible”.

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to atleastisoundknowledgable...
20th Apr 2019 13:35

atleastisoundknowledgable... wrote:

To be fair, I read “the £12k needs to be charged to the director's loan account and therefore disallowed in the corporation tax computation.” as “it’s currently in the P&L, but it should be in the DLA and therefore not deductible”.

So did I - but it could've been clearer.

Uphill battle ahead if you want CGT treatment for this. It's trading as far as I'm concerned but, if the taxpayer could cobble together a reasonable argument, I'd have a go for CGT treatment, with full white space disclosure.

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20th Apr 2019 12:31

How did you measure the 12k?

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