Buying a property as a contractor

[Jessica@WhiteFieldTax]

So, I mitigate the Income Tax up front but get hit further down the line for CGT - if, as and when it is ever sold.

I realise this wouldn't apply to the stated example if he is a cash buyer. Otherwise I reckon it is swings and roundabouts in the tax world.

Problem is if you are anticipating capital growth on your BTL you are letting yourself in for higher tax later on.

Supposing you are a cash buyer now, £100k. Sell in five years time at £150k. Assume 40% taxpayer. Ignore rental income, as it will have an effective tax rate at 40% whatever you do.

Buy it personally, you suffer 25% on the £100k dividend, £25k. When you sell it, you pay 28% CGT less annual exemption on the profit - £50k-£10k, = £40k at 28% = £11k. Total tax £36k. Of which £11k is deferred five years. Profit after CGT is in your name.

Buy it in the business - no tax now. When you sell it, 20% CGT on profit = £10k. 25% Higher Rate on extracting proceeds £140k after tax @ 25% = £35k - total £45k.

Alternatively if you took the proceeds out as part of closing the company down and were able to get it all out at 10% entrepreneurs relief (maybe, maybe not if there is a BTL on balance sheet) then 10% on £140k = £15k + £10k Corporation Tax = £24k - but if you couldn't get ER then £140k at 28% = £39k + £10k on profit = £49k.

To be totally accurate you need to consider discounted cash flow, but with current low interest rates the effect won't be huge.

In summary, unless you can time sale with closing the company down and you can be sure of ER - which isn't available if there are substantial non business assets on balance sheet - then the figures suggest buying personally is a better marginal tax rate, subject to having a tax hit now rather than all deferred.

But, as always, do the maths and take advice from your own accountant...

[northernladuk]

What is the score with the mortgage as well? Will you not find it harder to get a lender to offer a BTL to a LTD company and also end up paying a worse rate or are the same products available to an LTD that are available to Joe Public?

[Jessica@WhiteFieldTax]

What is the score with the mortgage as well? Will you not find it harder to get a lender to offer a BTL to a LTD company and also end up paying a worse rate or are the same products available to an LTD that are available to Joe Public?

Probably.

[simes]

Supposing you are a cash buyer now, £100k. Sell in five years time at £150k. Assume 40% taxpayer. Ignore rental income, as it will have an effective tax rate at 40% whatever you do.

Buy it personally, you suffer 25% on the £100k dividend, £25k. When you sell it, you pay 28% CGT less annual exemption on the profit - £50k-£10k, = £40k at 28% = £11k. Total tax £36k. Of which £11k is deferred five years. Profit after CGT is in your name.

Buy it in the business - no tax now. When you sell it, 20% CGT on profit = £10k. 25% Higher Rate on extracting proceeds £140k after tax @ 25% = £35k - total £45k.

Alternatively if you took the proceeds out as part of closing the company down and were able to get it all out at 10% entrepreneurs relief (maybe, maybe not if there is a BTL on balance sheet) then 10% on £140k = £15k + £10k Corporation Tax = £24k - but if you couldn't get ER then £140k at 28% = £39k + £10k on profit = £49k.

Hi Jessica,

Many thanks for that splendid display of calculations. I concede the mathematical honours.

To be frank, I didn't go into it in anywhere near as much depth - mine was a decision based more on deferment than anything more long term. The thing is for me, that when this flat gets sold, all things being equal, it will be so many years from now that all the rules may well have changed beyond all comprehension from what we know now. It will be at that point that that I will learn the lie of the (new) land.

All the best.

[simes]

What is the score with the mortgage as well? Will you not find it harder to get a lender to offer a BTL to a LTD company and also end up paying a worse rate or are the same products available to an LTD that are available to Joe Public?

At the time I got my mortgage, I was told (by the FA) that there were only two such lenders. I went with the Bank of China who had the far lesser set up charge than Natwest.

I did ask about interest only, but was told by the lender that these didn't exist [at that time] for company loans.

Also, the rate in my circumstance was sort of mitigated because all the excess company profits went straight into paying off the capital - it was all paid off in a year and a half. Small price to pay. The rate was 5.5% which isn't exactly excessive compared to personal mortgages.

This was in 2009/10 at pretty much the height of the world's woes.

[northernladuk]

Hi Jessica,

Many thanks for that splendid display of calculations. I concede the mathematical honours.

To be frank, I didn't go into it in anywhere near as much depth - mine was a decision based more on deferment than anything more long term. The thing is for me, that when this flat gets sold, all things being equal, it will be so many years from now that all the rules may well have changed beyond all comprehension from what we know now. It will be at that point that that I will learn the lie of the (new) land.

All the best.

Yeah and not for the better so costing you more. We lost the sliding scale relief on profits for sales last time so I cant belie e for one minute the next change will be for the better. Have to say your last posts detailing your approach that a complicated investment such as this are pretty disappointing.