Capital Gains changes and buying property as company assets

[Ruprect]

OK, with the changes to capital gains, would it be worthwhile using the company's money to buy property now?

So I see it as this (though there is probably some basic mistake somewhere):

Company buys property, say for 100,000. For the sake of argument lets say there is 50K cash 50K mortgage.

Mortgage cost: £300 per month = £3600 p.a.
Rental income: £500 per month = £6000 p.a.

£1400 profit subject to 22% CT (as it will be eventually)

If the company sells the property it is subject to 18% CGT - is the gain then classed as profit too and subject to CT?

Anyway if I do this personally, the £1400 would be subject to 40% tax wouldn't it (assuming I'm in the higher tax bracket)? If I sold it I would personally by liable for 18% CGT as its a second home.

Though I'm not sure, it still seems like there is more tax to be paid taking the company route...

but what about the following scenario:

company buys house, company disolved and dissolution treated as a capital gain; all assets go to shareholder and taxable at 10% (entrepreneurs relief) including the house. So say the house is still worth 100K, 10K CGT is due on this at this time. If I then sell the house it will again be subject to 18% CGT as a second home (now I own the asset)...

so it still seems like there is more tax to be paid using the company. Have I got this right?

[Danbro]

Danbro Accounting Ltd

Hi,

Nice question for a Sunday morning, as you say the rules have all changed, mainly for individuals though.

Firstly, for the mistakes

1) You will make £2400 profit
2) One key thing not mentioned is that all the profit you make on rental income and any gains from selling the property would be in your company, as you are a higher rate taxpayer you will incur another 25% tax in taking this money out as Dividends.
3) Companies don't actually pay capital gains tax, they pay Corporation Tax on the chargeable Gains.

Just one other thing to note is that companies don't benefit from the annual tax free allowance like individuals get, £9200 in 07/08, if bought jointly you could benefit from double this.

Will look into your final scenario tomorrow, normally I would advise to purchase property personally unless you are in it for the long term.

Hope this helps

[Ruprect]

Thanks Neil,

It would be good to get some idea of the point at which the ongoing company profit route on an income earning asset make this the better option...I think I'll try and knock up a spreadsheet on this.

If you can get >7% on rental income and capital appreciation (making the assumption that it will appreciate) then the money would be better off than in the bank anyway no?

[Nixon Williams]

The "profit" of £2400 assumes that all the mortgage payments were interest only, capital repayments do not reduce the profit and are not relieved against tax.

In the long term, although Capital Gains Tax is now 18% (Enterpreneur Relief would not apply, as the company is not "trading") - you would overtime lose out due to the withdrawal of indexation relief etc.

If you are in the property investment game for the long term and not just a quick profit, then currently an investment via a limited company can be quite an advantage.

The Capital Gains Allowance for the current year is £9600 (2008/09)

Alan

[Ruprect]

The "profit" of £2400 assumes that all the mortgage payments were interest only, capital repayments do not reduce the profit and are not relieved against tax.

In the long term, although Capital Gains Tax is now 18% (Enterpreneur Relief would not apply, as the company is not "trading") - you would overtime lose out due to the withdrawal of indexation relief etc.

If you are in the property investment game for the long term and not just a quick profit, then currently an investment via a limited company can be quite an advantage.

The Capital Gains Allowance for the current year is £9600 (2008/09)

Alan

What is the difference between MyCo having 100K in a bank paying 3.5% interest, and MyCo having a 100K house paying 7% (7K/year) in rent? Assuming that I'm still trading the "day job" increasing the profit in MyCo's bank account? Aren't both classed as assets and subject to the same tax laws if my main revenue stream is still my main business's activity?

[Nixon Williams]

What is the difference between MyCo having 100K in a bank paying 3.5% interest, and MyCo having a 100K house paying 7% (7K/year) in rent? Assuming that I'm still trading the "day job" increasing the profit in MyCo's bank account? Aren't both classed as assets and subject to the same tax laws if my main revenue stream is still my main business's activity?

Possibly nothing! HMRC could well try and argue that as you have substantial assets then the company is treated as non-trading - it is not an exact answer that can be given as each is different depending upon the circumstances at the time.

Alan