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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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I live in one flat in a house that has been converted into

Customer Question

I live in one flat in a house that has been converted into 2 flats. We recently bought the freehold of the house and formed a company to do this. Will we need to pay tax if we live in the flats? Also if my neighbour decides to rent her flat would we then have to pay tax or is this totally separate?
Thank you for your advice in advance,
Debbie
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello Debbie, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Let us dispose of your neighbour first. What she does is an irrelevance and you incur no tax from her activities.
If you do not pay the company the current market rent for the flat you occupy then, if you are a director of the company, you will be deemed to have received a benefit in kind and will be liable to income tax on that benefit.
I do hope I have assisted you with your inquiry.
Customer: replied 1 year ago.

As I understand it the company is a formality to purchase the freehold with another person. We are partners in the company. I cannot pay current market rent on my own flat. Is this what you are saying?

Expert:  bigduckontax replied 1 year ago.

It is not your own flat Debbie, if is the company's flat which you occupy. Either you pay the company the market rental (which will make the company be liable to Corporation Tax at 20%) or you will be taxed on that rental as a benefit in kind. Whichever way the cat jumps there will be a tax liability, a classic example of Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.

Customer: replied 1 year ago.

okay, I am totally confused. We bought the freehold and on advice formed a company so that both of us can be safe in our management of the properties. I cant pay a mortgage to a mortage company and then market rent so what you are saying is I am paying twice for my property I already own. No one would do this if this is the case. There must be another way then to own a freehold that doesn't incur bankruptsy!

Expert:  bigduckontax replied 1 year ago.
your solicitor not warn you of the taxation consequences of your method of purchase of the freehold? Were you not reminded that when you come to sell you will not be entitled to Private Residence Relief (PRR) on any gain made on ultimate disposal? That gain will accrue to the company as income as company's are not liable to Capital Gains Tax as such? PRR would relieve nay gain at 100%.
Most people own the freehold of their property, live in it and pay the mortgage off over time. They do not go into the palaver of intermediate companies holding the ring as it were.
I am so sorry to have to rain on your parade.
Customer: replied 1 year ago.

We do own the freehold of our property and live in it and are paying the mortgage off over time. We just happen to be 2 flats who jointly hold the freehold and this is the recommended way to buy the freehold. Can you recommend any other ways we could have bought it?

Expert:  bigduckontax replied 1 year ago.
Yes, you would avoid the current situation had you simply bought the freehold between you as Joint Tenants, that is the leagal term for a joint ownership.
Customer: replied 1 year ago.

Is it possible to change this if it hasn't been finalised?

Expert:  bigduckontax replied 1 year ago.
As far as I am aware yes, but you may need to consult your solicitor as to the exact position. From what you say the company will have to sell [ie transfer] the building back to the pair of you. This could be achieved by means of a Land Registry f=direct transfer which is a much cheaper method.
bigduckontax, Accountant
Category: Tax
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Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 1 year ago.
Thank you for your support.

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