Lump sum in ltd company and investing in property

[mekondelta]

Hi,

I have 100k+ in a limited company that I use for my contracting work. As we all know money in business accounts earns virtually no interest.

I want to invest the money in a property based on the following assumptions:-
- I need to lend some money to the company to purchase the property in full. I will lend to the company
at a commercial rate. I realise I will need to pay tax on this interest.
- I don't want a commercial mortgage as I don't want any risk.
- I will hold the property long term for rental income not capital investment
- I will continue to contract through the limited company for at least the next 10 years
- I already have personal property investments. This is purely a way of using up the money that is in my company account.
- I believe that I can make almost 6% from rental investments after expenses. I'm currently getting less than 1% on sums above 100k and even deposit accounts are miserable.

I guess the best way would be for my company (C1) to create and own a new LTD company (C2) as I've been told by my accountant that the property purchase would turn C1 into a Close Investment Company? C1 would transfer the money to C2 profits from C2 would be paid to C1. With the extra money in C1 this could be used to fund a pension.

I think C2 is needed as I don't want to get rental income taxed from the flat rate VAT scheme as well as corporation tax. Also changing the nature of C1 from a service company would mean that I couldn't claim expenses as a contractor according to my accountant.

My accountant basically doesn't want to know and thinks I should extract the money from the company (at 40%!!) and buy it personally but that defeats the purpose of leaving the money in there in the first place. I don't want to be a higher rate payer if I can avoid it.

Anyone have any advice for my personal circumstance? There are a lot of forum posts about property but not from people who already have property investments personally and large sums in a company account.

Any help appreciated!

[northernladuk]

You are forgetting the 25% tax on all loans open 18 months after company year end? (455 of the Corporation Tax Act 2010 (section 455 CTA2010)

Investing I property through the company has long be said to be a bad idea for many reasons hence no one does.

When he talks about 40% hit to get it out personally think about the 20% CT and the the higher rate dividend tax to pull it out when you realise the profit and so on. We've all got war chests and I don't know a single person that has property. That says a lot to me.

[Jack Kada]

You are forgetting the 25% tax on all loans open 18 months after company year end? (455 of the Corporation Tax Act 2010 (section 455 CTA2010)

Investing I property through the company has long be said to be a bad idea for many reasons hence no one does.

When he talks about 40% hit to get it out personally think about the 20% CT and the the higher rate dividend tax to pull it out when you realise the profit and so on. We've all got war chests and I don't know a single person that has property. That says a lot to me.

I know of one who has bought a property in the company name. I think it is a very sensible idea.

Exactly why would you discourage this? If anything this shows that the company is a real company which takes financial risk and is not just a disguised employee

What precisely are your reasons for saying this is a bad idea

[northernladuk]

The multitude of posts from accountants pointing out the problems and downsides over the years... I'm not saying its impossible but it appears it's not for most and needs very careful end to end planning.

The fact it's not part of standard advice and no one seems to know exactly speaks volumes as well. The contractor model has been around long enough for property to become a standard option if it worked.

https://www.google.co.uk/search?q=bu...spv=1&ie=UTF-8

[WordIsBond]

You are forgetting the 25% tax on all loans open 18 months after company year end? (455 of the Corporation Tax Act 2010 (section 455 CTA2010)

This, I believe, is referring to loans from the company to a shareholder / director. OP is talking about personally loaning money to the company, which incurs no tax. And repayments of that loan by the company to OP would not be taxable (though interest would be, of course, subject to the new interest allowance next year).

Investing I property through the company has long be said to be a bad idea for many reasons hence no one does.

In general, I agree, what I said above notwithstanding. He's talking about a different structure, though. People DO invest through their company. Basically, he's talking about creating a property company and his contracting company buying it. As far as the contracting company, it is little different from any other investment -- it could be shares in HSBC -- except you get into complicated rules about linked companies and who knows what else.

OP: I don't think it is the property side of things that would be concerning so much as what kind of regulations apply to two linked companies. I would think accountancy / legal fees would be costly. And I doubt many contractors will be able to give you any worthwhile advice on that kind of stuff.

You've said your accountant doesn't want to know about it, but not said why. Did he tell you why? If not, and you couldn't be bothered to ask about his reasoning, why post about it here? If he did tell you why, why didn't you give us his reasoning?

Several things in your post don't add up.
1. You don't want the rental income to be subject to corporation tax -- what do you think will happen in C2? If you have rental income greater than expenses, you'll have tax.

2. You want the rental income to fund a pension? Why not just, you know, fund a pension with this money? If you are prepared to lock it up long term, a pension is (currently) a great tax-efficient way to get money out of the company. That option may not be available forever, so maybe it is a good idea to extract money now while you can. You can do £40K this year and £40K next (presumably) and problem is solved.

3. You said you don't want risk. You have just as much risk with a mortgage and cash on hand as you do with no mortgage and no cash. If you choose to leverage your investment by buying multiple mortgaged properties, you increase your risk. But if you are buying one, you don't really change the risk dynamic by putting personal money into it and avoiding a mortgage. If the property value goes up you profit, if it goes down you lose money. Your risk profile isn't really significantly different -- and if you don't understand that, then you don't really understand what you are doing, which makes me wonder what else you don't understand.

In general, if your accountant is saying something is a bad idea, it probably is....

[northernladuk]

Exactly why would you discourage this? If anything this shows that the company is a real company which takes financial risk and is not just a disguised employee

And there is so much wrong with this paragraph I don't know where to start. What has buying property hot to do with your status at a client. Quick clue. IR35 is on a contract by contract basis and has f all to do what you do with LTD money. I don't even how else to address the rest of that statement.

Oh hang on.. You are trolling aren't you? Please tell me you are.....

[Craig at Nixon Williams]

Purchasing property through a company is possible, and can be tax efficient, but that depends on your circumstances – as you have suggested, you would set up a second company to hold the property (known as a ‘Special Purpose Vehicle’), receive rent etc. You can then loan money to this company from your contracting company to finance the purchase and the loan would not be subject to S.455 tax.

You should speak to an accountant about this in more detail – whether it would be advisable or not will depend on your personal circumstances.

[northernladuk]

Purchasing property through a company is possible, and can be tax efficient, but that depends on your circumstances – as you have suggested, you would set up a second company to hold the property (known as a ‘Special Purpose Vehicle’), receive rent etc. You can then loan money to this company from your contracting company to finance the purchase and the loan would not be subject to S.455 tax.

You should speak to an accountant about this in more detail – whether it would be advisable or not will depend on your personal circumstances.

I took the S455 comment from an old NW post as it happens must have taken it out of context. My bad. It is a factor for those that want to buy it outside of a company though yes.

[SandyD]

2. You want the rental income to fund a pension? Why not just, you know, fund a pension with this money? If you are prepared to lock it up long term, a pension is (currently) a great tax-efficient way to get money out of the company. That option may not be available forever, so maybe it is a good idea to extract money now while you can. You can do £40K this year and £40K next (presumably) and problem is solved.

.

Only people who do not recall or lived through the pension crisis / crash say that !! I do not trust pension funds at all !!

[ASB]

There are pros and cons. Quite a lot depends on your long term plans and what happens in actuality.

I didn't go the company route and I don't know anybody who has (including some with very substantial property portfolios).

This could be useful. Property Company Tax Advice Guide

Owning a property within a trading company probably wouldn't be enough on it's own to make it a close investment company; but there is a risk. Then there is VAT on rentals and all manner of things to consider.

The investment company which could well be the case if it is only holding properties would not be entitled to the lower rate of CT.