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bigduckontax, Accountant
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I am just about to purchase a property to be run as a youth

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Hi,
I am just about to purchase a property to be run as a youth hostel. I am paying for the property out of personal funds (no mortgage) and intend to keep the property for a long time and actively run the business.
I am close to exchanging contracts - is it beneficial to purchase the property in the name the ltd. business I have recently incorporated - or should I retain it as an individual? What are the pros and cons of each option.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

If you run this business through a limited company you place a buffer between yourself and the business should some disasterous event take place which, had you owned it direct, been a personal liability. Any profits made would be taxed at 20% Corporation Tax (CT). Any emoluments paid to you as a director would have to be made under PAYE arrangement which is a palaver you might like to avoid. Dividends up to 5K are tax free. The Chancellor today announced that he hoped to reduce the CT rate to 15% at some time in the future: jam yesterday, jam tomorrow, never jam today.

If you run this business as an individual you will have to regidter with HMRC for self employment and that Department will then snd you a self assessment tax return which you will have to submit annually after the conclusion of each tax year [5 April]. Any profits you make will be taxed at your marginal rate of tax. Basic rate is 20%, higher rate band over 32K income 40% and additional band over 150K, 45%. If you go over 100K you will loose your personal allowance [11K] at the rate of a pound for every two quid over.

I do hope that you have found my reply of assistance.

Customer: replied 1 year ago.
Hi, thanks for the swift response, but I already run a business so am aware of the above. Really what I want to know are, are there any tax implications of buying the property as a business as opposed to an individual (stamp duty etc.). And as the property is funded from me personally how is this recognised (essentially gifting it to the company albeit I will be the only shareholder) how is that processed if I choose to sell the property (implications for CGT etc., how the property ownership is transferred etc.) many thanks
Expert:  bigduckontax replied 1 year ago.

The Stamp Duty Land Tax in England and Wales will be the same.

To get the property into the company and avoid all the double shuffling I would suggest that you lend the funds to the company by means of a director's loan. This and its ultimate repayment would not have any tax consequences providing no interest was payable on that loan. If you then sell the property there is no CGT involved as companies are not subject to that tax, any profit made merely forms part of the company's trading. As an individual CGT would apply to the gain at 10% or 20%, after deducting your Annual Exempt Amount (AEA) of 11.1K; the rate depending on your income including the gain in the tax year of disposal.

Customer: replied 1 year ago.
OK thanks. I pay higher rate tax. So if I keep it as a personal property then should I lease it to the company as a way of reducing CT? Basically what will be my most tax efficient system of income. The property is £225K I will spend a further 75K on it. It will make a profit of circa 30K per year.
Expert:  bigduckontax replied 1 year ago.

30K a year at current CT rates would be a tax bill of some 6K. If subject to Income Tax at the higher rate of 40% the bill would be 12K, double. It would appear that running this business through your own taxation affairs would cost you considerably more in tax. Remember that if you use a company you can receive 5K in dividends without incurring any personal taxation at all.

Expert:  bigduckontax replied 1 year ago.

30K a year at current CT rates would be a tax bill of some 6K. If subject to Income Tax at the higher rate of 40% the bill would be 12K, double. It would appear that running this business through your own taxation affairs would cost you considerably more in tax. Remember that if you use a company you can receive 5K in dividends without incurring any personal taxation at all.

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Customer: replied 1 year ago.
Hi Keith - nearly there - so:
1. I set up a new ltd company
2. I lend the company the money to purchase the property and renovations - via a directors loan for which I charge no interest
3. The company makes profit - taxed at CT.
4. If I wish to draw any money then I can as dividends @32.5% (as I am above the 5K band from my other company)or
1. I set up a new limited company
2. the company runs the day to day operations of the hostel
3. the company pays me an annual amount to lease the property (on which I pay 40%)or
I just run the hostel business as a sole trader, declare the profits on my self assessment and pay 40%it seems that the 3rd option is the simplest - or am I totally missing something?promise this will be it! Just want to get things clear in my head - my partner in my other business deals with all these things usually!
Expert:  bigduckontax replied 1 year ago.

I am inclined to agree with your third option, but soft. If you run this as suggested in your first option but make no distribution then you personally will have no tax to pay and then you take the moneys at some future date when your tax liabilities may be less and your income falling within the basic rate band.

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Expert:  bigduckontax replied 1 year ago.

Thank you for your support.