I hope this is helpful and answers your question.
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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 propertyYou 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 After taxed profits (cash surplus) can be withdrawn as repayment of initial loan with no tax implications.I hope this is helpful and answers your question.
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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.
Iain, thank you for your reply..You are missing the point .. let us separate the issuesRental incomeThis 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 propertyThis 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.
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.
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 back1) 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.
Iain, thank you for your reply.I think I have already answered your question on tax implications of repayment of capitalI 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.
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.