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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4723
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Hello, I have a question about the most tax efficient way to

Customer Question

Hello, I have a question about the most tax efficient way to own commercial property. I would be very grateful if someone could answer it. I, along with my sister and brother in-law, recently bought some commercial property. The property consistes of 4 offices and since buying them we have refurbished and let them to tenants. The tenants pay rent into a personal account in my sister's name. We bought the offices outright in our own names and plan to keep them for the long-term and draw an income. There was no VAT payable on them. My question is, can we consider the money we used to buy the offices to be an expense and therefore deductible against future income drawing? If not, what would be the most tax efficient way to own them? Many thanks, Iain.
Submitted: 3 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 3 years ago.
Hello and welcome to the site. Thank you for your question.

Please advise if you are basic rate tax payers or higher rate tax payers.

Many thanks
Customer: replied 3 years ago.
Sorry, I should have included that. We are all higher rate tax payers.
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your prompt reply.

If I were you, I would form a LTD company and register the property in the company name.

As you are all higher rate tax payers, all income and gain would be charged at higher rate if you show it as individuals. IT 40%, CGT 28%

As company all income and capital gains are taxed at Corporation tax rate ..small profits up to £300k are taxed at 20%.

Your question - can we consider the money we used to buy the offices to be an expense and therefore deductible against future income drawing? If not, what would be the most tax efficient way to own them?

The monies used to buy the offices is capital introduced and repayment of capital is not an expense. You will be taxed on profits made by the venture/operation and not your drawings.

You could draw profits in the form of dividends on a need basis as and when you require cash in addition to repayment of loans.

Dividends would attract additional tax as you are higher rate taxpayers.

I hope this is helpful and answers your question.


If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.


Customer: replied 3 years ago.
Hello and thanks for your response. I would just like to clarify a couple of things you said.

You mentioned that repayment of capital is not an expense and that we would be taxed only on profits made by the venture/operation. By that do you mean that in our current situation, i.e. having the offices registered in our own names not owning them through a company, we could take an income up to the value of the money we used to buy the offices before we would be liable for tax? Or to put it another way, the initial income would be treated as repayment of capital not income.

You also said that forming a company would have benefits as the corporation and capital gains taxes would be lower. But if we have to take the money out of the company (either as income or dividends) would we not have to pay extra taxes on these which would bring us up to the same level as if we had just taken the money as income?

Many thanks.
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply.

You should separate drawings from profit generated by the venture. You have two ways of repayment of intial capital injection - cash generation
- through profits made
- sale of property

You cannot treat income received outside the profit and loss account. You pay taxes on that net income and distribute the rest.. As individuals this distribution is deemed drawings and as it is after tax profits there is no more tax to pay on drawings.

As a company, the company would pay CT on taxable profits at a rate lower than that applicable as IT. After taxed profits (cash surplus) can be withdrawn as repayment of initial loan with no tax implications.

I hope this is helpful and answers your question.

Customer: replied 3 years ago.
From what you say, irrespective of being an individual or a company repayment of a cash injection can be taken either from profits made (which in this case means rent) or taken back when the property is sold?
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your reply...

When you say profits, it means profit after tax and not profit before tax.

Rental income would be chargeable to either IT or CT. Any repayment of intial capital advanced from taxed profits would not be taxed again.

I hope this is helpful and answers your question.
Customer: replied 3 years ago.
Thanks for that clarification. From what you say the option would be to either take back the initial capital injection from the profits as we go along or from the sale or the property at some point in the future. Does that sound right?
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thats correct.

I hope this is helpful and answers your question.

f you are happy and there are no more issues I will appreciate if you would kindly rate the service I provided to ensure I get paid for it.

Customer: replied 3 years ago.
Ok. So to make sure I understand-

Repayment for capital introduced must be from profits or sale of the property.

Profits means after tax has been charged (either IT for individuals or CT for a company).

Therefore, it would be more efficient to wait and get the money back from the sale of the property otherwise you would pay IT or CT.

Does this sound right?
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you fo ryour reply.

You have got it wrong.

You are in receipt of rental income. This has to declared to HMRC by completing a tax return..

The net profit from rental income is chargeable to tax every year and what you do to profit after tax is your choice.

You pay IT or CT against the profits from rental income and this will be year on year.

You can draw the monies against original capital invested or retain the funds for reinvestement etc. This is already taxed money i.e it is distribution of taxed profits.

In summary
- pay tax on rental income every year provided you retain the commercial property and it is earning rental income - taxed either IT or CT
- draw money from taxed profits to repay initial investment as and when finances allow...this is non taxable.

I hope this is helpful and answers your question.

Customer: replied 3 years ago.
I don't follow. You said -

- draw money from taxed profits to repay initial investment as and when finances allow...this is non taxable.

Therefore, you are drawing money from taxed profits to pay back the investment. Even though you pay no further tax, you have still payed tax. Whereas if you wait until the property has been sold you can take back your original investment.

I guess I'm missing something. Can you point out where?
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply..

You are missing the point ..
let us separate the issues

Rental income
This is a revenue item and is chargeable to IT or CT.
You file a tax return every year and report what the profit from rental income is.
Net cash after tax is available for distribution... you can either take money out of the bank account or retain it. You will not be taxed on the withdrawal.


Commercial property
This is capital expenditure and fixed asset. Any profit you make on sale of it would be chargeable to capital gains tax.
You distribute the net proceeds after CGT.

In either case, what you distribute is taxed money and therefore no further tax payable.

 

I hope this is clearer and answers your question.

Customer: replied 3 years ago.
Thank you for that. I understand both your points but unfortunately I am no clearer on my original question.
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply.

Your original question - can we consider the money we used to buy the offices to be an expense and therefore deductible against future income drawing?

The expenditure related to purchase and refurbishment of property is capital cost and deductible against sale price of the commercial property.

If not, what would be the most tax efficient way to own them?

I hope this is clearer and answers your question.

Customer: replied 3 years ago.
I don't follow, earlier you said there were two ways of repaying a cash injection, through profits made or sale of a property.

Could you clarify please?
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply..

I will try to explain...

You have spent money in buying the commercial property.

If you want your money back..there are two ways of getting your money back

1) Every year you receive rental income.. after you have paid tax on it the balance is available for you to withdraw. This withdrawal is repaying your initial investment.


2) Your money is sunk in this investment until such time you dispose of the property and have access to it.. once you have sold the property there would be cash available for you to repay yourself.

I hope this is clearer and answers your question.

Customer: replied 3 years ago.
I understand both of those points about repayment of capital, but my question relates to the tax implications of the repayment of capital, which you have not mentioned.

We don't really seem to be getting anywhere with this. Sorry. I tried to restate the question but in the end I deleted it as it was going over stuff I had previously said. I'm not sure what else to do.



Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply.

I think I have already answered your question on tax implications of repayment of capital

I will summarise it for you once again..

 

As you are higher rate taxpayers, you should consider using LTD company route for this investment. It would appear to be more tax efficient for reasons aforementioned.

Any repayment of capital has no tax implications because you were getting back the money loaned by you into the venture. If you put in £10,000 and take out £10,000 then you have only taken what you put into the business resulting in no gain. If no gain then there is no tax to pay.

I was also trying to explain to you that you could not take rental income as a repayment of loan without first paying tax on that rental income.

Furthermore, any repayment of intial investment upon sale of the property would also not attract tax as you would have paid tax on any capital gain made from sale of the property.

 

You are taxed on income or capital gain and not repayment of capital.


I hope this is clearer and answers your question.

Customer: replied 3 years ago.
Thank you for that. It makes sense and is as I understood it from your previous comments. I would be grateful if you could summarise again the tax benefits of forming a company. I don't think we quite got to the bottom of it and I think this was possibly where we initially started to miscommunicate. Thanks.
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your reply.

Tax benefits of forming a company

Corporation tax rate 20% - profits up to £300k
capital gains are taxed at CT rate - 20% (although you don't get annual gains allowance of £10,900)
say the chargeable gain is £50k
CT at 20% = £10,000
CGT (50,000-10,900) at 28% = £10,948 (you are higher rate tax payer)

Retained profits can be taken as repayment of initial capital introduction whereas profits from rental income taxed at marginal rate of personal tax if self employed.

I hope this is helpful and answers your question.
Customer: replied 3 years ago.
Understood. And I think I see where we went wrong. I would be grateful if you could clarify two things-

If we were to take money out of the company in the form of dividends or income and which was not repayment of a capital introduction then this would incur extra taxes (which would, I assume, bring it up to about the same level as if it were just income from personal ownership). Is this right? If so, it would seem that there was less point in forming a company to achieve this.

But if we were to take money out of the company which was repayment on a capital investment we would have to pay the CT but nothing thereafter. Is this right? If so, again, it would seem there would be less point point in forming a company to achieve this as under personal ownership we could instead wait until the property was sold and take back the capital then and without paying tax on it (assuming it has not appreciated).
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your reply

[Q]
If we were to take money out of the company in the form of dividends or income and which was not repayment of a capital introduction then this would incur extra taxes (which would, I assume, bring it up to about the same level as if it were just income from personal ownership). Is this right? If so, it would seem that there was less point in forming a company to achieve this.

[A]
If you took both income and dividends then maybe the tax position is neutral.
If you were to take dividends only then you would be slightly better off being a company. Dividends would be taxed at 32.5% whereas profits as individuals would be taxed at 40%.

[Q]
But if we were to take money out of the company which was repayment on a capital investment we would have to pay the CT but nothing thereafter. Is this right? If so, again, it would seem there would be less point point in forming a company to achieve this as under personal ownership we could instead wait until the property was sold and take back the capital then and without paying tax on it (assuming it has not appreciated).

Money taken out as repayment on a capital investment.. no personal tax other than CT.

Even if the asset did not appreciate, any repayment of capital would not attract tax under LTD company.

You forget profits are being taxed at 40% if you remain individuals whereas the same profits are taxed at 20% if your operate at LTD company.

I think we were covered all aspects now and I feel we should conclude.

I hope this is helpful and answers your question.
Customer: replied 3 years ago.
From your first point; I understand that some could be taken as dividends and which would reduce the tax liability slightly (that was why I said it would be 'about' the same) so let's say that I understand your first point, that there would be a slight tax benefit, and leave that one there.

I didn't forget that profits were being taxed at 40%. My point second point was, as I said, that I do not see the need to form a company to get a tax reduction on the repayment of capital investment when, instead, I could remain an individual and simply sell the property at some point in the future and have the original capital returned then without incurring tax. Is this, as I have asked on a couple of occasions, correct or not?
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your reply.

You would not incur tax if you have the original capital returned whether you remain an individual or have it returned through LTD company route.

In either scenario, repayment of capital does not give rise to tax in any form.

I hope this is helpful and answers your question.


Customer: replied 3 years ago.
I think you are saying yes to my question. I can only assume you are trying not to use the words yes or no for some reason.

That being the case, as I have been saying for some time but you have not been confirming, the only actual benefit of creating a company is that, as with any company, one has the option of paying dividends, which might reduce tax. Assuming, of course, that you are willing to get your capital investment returned after you sell the property.
Expert:  taxadvisor.uk replied 3 years ago.

Iain, thank you for your reply.

I am saying yes to the fact that any repayment of original capital invested would not incur tax. This would be tax free in your hands.


The advantage of LTD company is lower tax on your profits and capital gain as you are higher rate tax payer.

 

Your original question was looking at tax efficiency.

I hope this is helpful and answers your question.

If you are happy and there are no more issues I will appreciate if you would kindly rate the service I provided to ensure I get paid for it.

Customer: replied 3 years ago.
I am very sorry as I know you have worked hard but I cannot rate this as a satisfactory service. You seem to be viewing this as a debate rather than providing me with information. In my last message I was simply trying to confirm whether that despite the benefits of lower tax on profits and capital gain that an ltd would bring, I would still be liable for extra taxes when I took money out of the company in the form of income or dividends. If this is true, it would seem an issue as it would be an extra tax which you haven't mentioned.
Expert:  taxadvisor.uk replied 3 years ago.
Iain, thank you for your reply.

I am not viewing this as a debate but answering your question with explanations ..

I have already covered all expects of tax covering income and dividends ..
see answer sent yesterday at 12:31

"The net profit from rental income is chargeable to tax every year and what you do to profit after tax is your choice.

You pay IT or CT against the profits from rental income and this will be year on year.

You can draw the monies against original capital invested or retain the funds for reinvestement etc. This is already taxed money i.e it is distribution of taxed profits.

In summary
- pay tax on rental income every year provided you retain the commercial property and it is earning rental income - taxed either IT or CT
- draw money from taxed profits to repay initial investment as and when finances allow...this is non taxable. "

also my answer at 12:50

Rental income
This is a revenue item and is chargeable to IT or CT.
You file a tax return every year and report what the profit from rental income is.
Net cash after tax is available for distribution... you can either take money out of the bank account or retain it. You will not be taxed on the withdrawal."

You have the option to take money out of the company as repayment of initial capital invested and that would be tax free.

I even gave example showing tax comparison
see answer at 18:11

"Tax benefits of forming a company

Corporation tax rate 20% - profits up to £300k
capital gains are taxed at CT rate - 20% (although you don't get annual gains allowance of £10,900)
say the chargeable gain is £50k
CT at 20% = £10,000
CGT (50,000-10,900) at 28% = £10,948 (you are higher rate tax payer)

Retained profits can be taken as repayment of initial capital introduction whereas profits from rental income taxed at marginal rate of personal tax if self employed."

Which ever route you take the rental income will attract extra tax and you pay that every year when completing your tax return and I have stated that before.

I don't see how you consider this not to be satisfactory service.

I hope this is helpful and answers your question.

Expert:  taxadvisor.uk replied 3 years ago.
Iain, if you can't rate this as satisfactory service then I request you not to rate it at all.

I will happily opt out because I believe I have answered all questions raised by you.

Please advise.

Many thanks
Customer: replied 3 years ago.
OK, I am very sorry but in that case it is better you opt out. I think perhaps where we may be going wrong is that we are talking about two things interchangeably, but neither of us is making it clear which one we are taking about. The two things being taking money out of the company when it is repayment of invested capital (no extra tax to pay after CT) and taking money out of the company when it is just a salary or dividends (CT tax to pay and then an additional tax on the dividends). But, like I said, I am not 100% sure this is the case as I cannot get you to confirm it. Many thanks for your time and sorry again it didn't work out.
Expert:  taxadvisor.uk replied 3 years ago.
Thank you

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