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TonyTax
TonyTax, Tax Consultant
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, I borrowed money to help my partner set up a property

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Hi,
I borrowed money to help my partner set up a property letting service. I bought two houses. The plan was to transfer them to his company, he would get the rent and if we sold the houses I would get any profit on the sales. We saw an accountant who asked to see me in private. He queried that this situation may look like tax evasion and insisted I put my name on the company as a joint director. Can it be possible to evade tax on money that is borrowed and not yours?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Let me take a look at this and I'll get back to you.
Expert:  TonyTax replied 2 years ago.
Hi again.

You cannot evade tax on borrowed money, only on income or gains. If you borrowed the money from a traditional lender, they will have an issue with you giving the properties away which is what you appear to be intending to do for all intents and purposes, given that you are not a shareholder in the company.

I'm not entirely sure what you think you will be achieving by following the process you outlined in your question. If the idea is for you to avoid tax by your partner handing you a share of the profits as a gift on eventual disposal of the properties, it may work and it may not work. There is anti-avoidance legislation to crack down on circular transactions whereby a set of steps are followed to avoid tax. HMRC may ask some questions.

As you will see here, where the property owners are not married to one another or in a civil partnership, the rental income does not have to be split in the same proportions as the ownership of the property is.

If you transfer the properties to your partner's company, there may be Capital Gains Tax implications for you even though you would not receive any cash immediately. That may not be a problem as you will only just have bought them and so there will be no inherent gain if you are treated as having "sold" them to the company.

By giving the properties to a company owned by your partner, you are effectively making a gift and losing control of the properties. If the properties are owned by the company and they are sold at a profit, the company will pay corporation tax at 20% on the profit and may get some indexation allowance for inflation if they are held for any length of time which would reduce the tax liability.

As the company may be classed by HMRC as an investment company as opposed to a trading one, the only way to extract money from it may be in the form of dividends which could give rise to substantial personal tax liabilities for the shareholder(s). CGT is only charged on individuals at 18% or 28% or a combination of the two rates depending on the level of the individual's income.

I hope this helps bur let me know if you have any further questions.
Customer: replied 2 years ago.

Thank you.

My purpose in buying the properties was to help him start up a business. There was no intention to avoid tax on my part. The company was purely to manage the rent. If I were a joint share holder in the company would this simplify things?

Expert:  TonyTax replied 2 years ago.
Will the company's only business be to let the properties?
Customer: replied 2 years ago.

Yes

Expert:  TonyTax replied 2 years ago.
Thanks.

You should talk to your accountant who could give you some illustrations of the tax implications of owning property personally and through a company as far as tax on the rental income and on gains from selling the properties is concerned.

If you go the company route, you would be well advised from a legal point of view to own shares in the company to protect your interest in the properties. Take a look here and here for an idea of the things you should consider when owning property through a limited company. I have no connection with either of the businesses which wrote the articles.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15886
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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