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bigduckontax, Accountant
Category: Tax
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Hi I have a question about buy-to-let property through a company

Customer Question

Hi I have a question about buy-to-let property through a company as my personal income tax rate is very high. What are the things to consider?
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

Firstly your company will pay Corporation Tax (CT) at 20% on any profits it makes from the rental property. If the property is ultimately sold there will be no Capital Gains tax, but any gain (or loss) will go into the company's Profit and Loss Account for CT purposes. Any rental received will go towards the profits of the company, but on the converse any expenditure will go on the other side of the equation. If a loan is taken out to fund the purchase the interest payable also goes against the profit, repayments of the principal, however, do not.

A great CT saving can also be achieved by the company making contributions to your private pension scheme. The amount transferable is unlimited unlike your personal ones which are limited to 50K this tax year and 40K next. The payments made by your company are allowable against the CT calculation.

You will, of course, have to set up the company, a not expensive exercise, but those costs are not allowable against the ultimate CT bill. You will need director(s), a registered office and have to submit returns and accounts annually. Most of this can be done from home over the net.

On a personal note I assume that you have maximum savings in tax free accounts for individuals eg ISAs, National Savings Certificates etc. Helps save a few pennies! Iv'e an ISA which can trace its roots back to the TESSA!

I do hope I have been of some help to you.
Customer: replied 3 years ago.

 


Hi,


 


Thanks for the above information.


I am myself subject to 40% effective tax rate while my wife is unemployed. So I want to use her personal allowance.


Following is my proposed structure (me being an accountant too but not a tax expert).



- I will set up the company and I will be the sole owner and director. I will give personal guarantee to the company for its liabilities.


- My wife will give a loan of £40k to the company to be used as a deposit for the buy-to-let mortgage. Interest will be paid on this to her which will be CT tax allowable. For her, this income will be within her personal allowance.


- My wife will be responsible for property management and will draw reasonable salary from the company against tax allowable for CT purposes. Again for her this will be within her personal allowance. I will register her for PAYE.


- Bank will take a charge on the property and give company the loan amounting to £110k to buy the property in the name of company. The interest paid on mortgage will be allowable for CT tax.


- The net income of the company after all deductions (including the interest and salary paid to wife, 10% wear and tear and other allowable expenses) will be subject to 20%. I am expecting this to be a really small amount as per my calculations.


- Once this is in place, I will convert the loan of my wife in to shares so she becomes majority owner of the company. She will be able to draw dividend income within the personal allowance.


Overall my plan is to keep the income withdrawn by my wife to be within her personal allowance of approx £9k a year so there will be no tax payable be her.


 


Question I have for you:


 


1. Do you see any additional tax implications in the above that I am missing out?


2. Salary drawn by my wife and the interest paid to her on the loan is allowable deduction?
3. Will converting loan into shares for my wife attract any additional tax?
4. If I sell the property how much tax will be payable on the capital gain?


Is it the standard CT rate? Also when I will dissolve the company or take out this gain as dividend will this be subject to tax again? (assuming it is over my wife's personal allowance limit).


5. If I have to put my home address as a registered address do I need to take a home insurance that includes that a business is being run?


 


Thanks for your help



Fazeel

Expert:  bigduckontax replied 3 years ago.
Hi Fazeel

1. Tax implications, yes - If you convert her loan to shares and she draws dividends these do not reduce the charge to CT. In the long term maybe, but...

2. Correct.

3. See my comment at 1. above.

4. A body corporate is not subject to CGT, any gain or loss on the property merely goes into the profit and loss account and is subject to CT.

Currently CT is 20%. Any dividends are taxable in the hands of the recipient and bear a notional 10% tax. If the individual's income goes into higher tax brackets the dividend is grossed up to the higher rate of tax applicable.

5. I am not an insurance expert, but most decent insurance companies allow a modicum of business use. You will have to examine your policy wording to acertain your current position.

I do hope I have been of help to you.
Customer: replied 3 years ago.

Hi thanks for your quick response. I am happy with your service and will rate the advice shortly.


 


Will I be able to ask a couple of more questions later even if I rate you now? These will be about the same structure as described above.


 


Just a quick question, the conversion of loan to shares in itself will attract any tax implication?


 


I do understand that dividend is not allowable for CT and it will be taxable in my wife's hand.


 


Thanks

Expert:  bigduckontax replied 3 years ago.
No problem. Conversion I covered as far as your wife was concerned. In the company however the reduction in the loan account will impact into the profit and loss account and may increase the amount of CT payable. When thinking of taxation always bear Benjamin Franklin's adage in mind. 'In life there are but two certainties, death and taxes!'
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3599
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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