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bigduckontax, Accountant
Category: Tax
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I intend to invest in property with a JV partner in the very

Customer Question

I intend to invest in property with a JV partner in the very near future and will doing so via a ltd company. I will be the sole director. My initial stance is to not take any dividends in the short term in order to reinvest all net profits for further acquisition. However, I will be using a combination of savings and a further advance against my residential property to make a directors loan to the ltd company (mortgage deposit).
I would be really grateful if could you answer the following questions:
1) Should I decide to, what are the tax implications of repaying a directors loan to me? I am assuming I could exploit the new tax-free Dividend Allowance but what about repayments above £5,000?
2) In the likely event of a refurb project, is it possible for a proportion of the refurb costs to be tax allowable? I have heard that by using key words on invoices such as replace, repair and renew this maybe possible.
3) Lets assume gross rent is £7,000 pa. Do I pay corporation tax on the entire £7,000 or is corporation tax payable after tax allowable expenses are deducted from the £7,000? Furthermore, what if tax allowable expenses exceed the £7,000? I assume the company will be operating a loss.
4) Subject to market conditions, and should we decide to sell the property post refurb, what are the tax implications of making a capital gain? For example, the ltd company makes a £10,000 profit following a successful refurb and sale.
5) What are the tax implications of repaying a proportion of the directors loan from this profit?
6) Can a ltd company still offset 100% of "finance costs" to arrive at profit?
7) Are the following considered "finance costs": BTL mortgage arrangement fees, BTL mortgage interest payments and interest incurred by a further advance on my residential property?
8) Are Accountant fees tax allowable?
Many Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello Steve, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. 1. Repaying loan made by a Director, or indeed any one else, has no tax consequences unless interest is paid. Interest would, of course be liable to Income Tax (IT) in the hands of the recipient. Under the 16/17 tax regime the first 1K of interest is tax free. 2. Refurbishment costs, if including improvements like the installation of double glazing, central heating, extensions, but not routine maintenance which can be used to offset rental income, would reduce the gain long term in the Capital Gains Tax (CGT) computation. At least that is how it would work were the owner not a limited company. Companies are not subject to CGT, all gains or losses merely passed through the trading account and exposed to the Corporation Tax (CT) regime. 3. You do not pay CT, it is a company liability not yours. CT would be levied on the company's net trading income ie after allowable expenses. If these exceed the income then there is no CT payable and there is a loss available to offset future surpluses. 4. As I explained above for companies capital gains are merely passed though the trading account and included in the CT computation. 5. None whatsoever, as explained in 1. above, interest, if paid, is taxable in the hands of the recipient. 6. Yes, except that formation costs are a capital, not a revenue item. 7. Yes. 6. Yes. I do hope that you have found my answer of assistance.
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Customer: replied 1 year ago.
Thanks Keith. Just two further questions so that my brain understands this.1) In the event I decide, as a director, that repaying the directors loan is a priority could all of the £7,000 rental income be considered tax allowable until it is repaid? In other words, the income that is effectively "net" after all other tax allowable expenses could be used to repay the loan with no CT payable.2) I should have been clearer on question 8). My fault. Accountancy fees are tax allowable but what about consultancy fees such as justanswer?Thanks againSteve
Expert:  bigduckontax replied 1 year ago.
1. The repayment of loans has no effect on the CT computation. If free cash is available within the company then loans can be repaid. Beware of the fraudulent preference, repaying a loan ahead of and instead of a trade creditor. 2. Allowable; I meant to mention that in my original reply. Please be so kind as to rate me before you leave the Just Answer site.
Expert:  bigduckontax replied 1 year ago.
Thank you for your support.
Customer: replied 1 year ago.
Thank you Keith. Apologies but this is not sinking in completely!So, in effect, could the directors loan be repaid from rental income before CT has to be paid? For example, is it the case that with a directors loan of £30,000 - £40,000, and it being consistently repaid from rental income of £7,000pa, the company could avoid CT until the loan is zero?
Expert:  bigduckontax replied 1 year ago.
No, not at all. The repayment of the loan has no effect on the CT computation whatsoever, unless interest is paid. If interest is paid then that element only is chargeable against the CT computation, but, of course, it is income in the hands of the recipient.

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