Reply to: Lump sum in ltd company and investing in property

[PurpleGorilla]

My IFA mentioned buying a commercial property via pension and then paying the rent out of the business and into the pension. It's a win win if you need a commercial property for your business.

[ChimpMaster]

Plenty of other discussions been had on this forum about this since.

[RonBW]

Hi mekondelta,

any luck with investing in property trough your ltd?

Thanks

mekondelta: Last Activity 5th August 2015 16:30

I wouldn't hold your breath on an answer

[giuseppev]

Hi mekondelta,

any luck with investing in property trough your ltd?

Thanks

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:-
...

Any help appreciated!

[WordIsBond]

The big problem with your calculations is you assume it Symmetrical, mortgage rates and savings rates will go up by the same amount at the same speed? I very much doubt it

I doubt it too.

I said an increase of 1% in mortgage rates "may" correspond to an increase of 0.5% in savings rates. Last I checked, 1% and 0.5% are not the same amount at the same speed. And I didn't say there was no interest rate risk, I said it would be "mitigated" by investment income. That means lessen the impact, not wipe it out. So I wasn't actually at all making the assumption you've stated. And when I read it again, I still didn't see that assumption.

But I agree, that assumption would be flawed.

[Underbase]

Decreases exposure to interest rates -- absolutely. If rates go up, presumably the rate your cash could return would also go up, so that risk is mitigated somewhat. Exposure to house prices? No difference.

Suppose you have £100K personal, £100K corporate, and you want to buy a £200K property. You can do it with £100K corporate and a £100K mortgage, and have £100K invested.

If mortgage rates go up by 1%, it costs you £1K -- but if mortgage rates go up 1%, savings rates may go up by 0.5%, so you'll gain £500 of the £1K back. The increase in savings rates will mitigate the damage of the increase in mortgage rates.

Obviously, if you have no mortgage, you have neither the cost of increasing rates nor the investment gain. So yes, you are less exposed to interest rate risk.

Under either scenario, your exposure to house price risk is the same. If it goes up by 10%, you've gained £20K, if it decreases by 10% you've lost £20K. It doesn't matter whether you've financed it personally or used a bank. House price risk is the same.

House price risk is increased when you use leverage to increase how much house you can buy. You aren't proposing to do that, we are just discussing two alternative ways to finance it.

I still think a SIPP probably makes the most sense, from what you've said. If the purpose is to finance a pension, just finance a pension.

The big problem with your calculations is you assume it Symmetrical, mortgage rates and savings rates will go up by the same amount at the same speed? I very much doubt it

[WordIsBond]

Having no mortgage or leverage decreases my exposure to interest rates and lessens my exposure to house prices (arguable). I realise it's no panacea. Commercial mortgages are also more expensive.

Decreases exposure to interest rates -- absolutely. If rates go up, presumably the rate your cash could return would also go up, so that risk is mitigated somewhat. Exposure to house prices? No difference.

Suppose you have £100K personal, £100K corporate, and you want to buy a £200K property. You can do it with £100K corporate and a £100K mortgage, and have £100K invested.

If mortgage rates go up by 1%, it costs you £1K -- but if mortgage rates go up 1%, savings rates may go up by 0.5%, so you'll gain £500 of the £1K back. The increase in savings rates will mitigate the damage of the increase in mortgage rates.

Obviously, if you have no mortgage, you have neither the cost of increasing rates nor the investment gain. So yes, you are less exposed to interest rate risk.

Under either scenario, your exposure to house price risk is the same. If it goes up by 10%, you've gained £20K, if it decreases by 10% you've lost £20K. It doesn't matter whether you've financed it personally or used a bank. House price risk is the same.

House price risk is increased when you use leverage to increase how much house you can buy. You aren't proposing to do that, we are just discussing two alternative ways to finance it.

I still think a SIPP probably makes the most sense, from what you've said. If the purpose is to finance a pension, just finance a pension.

[WordIsBond]

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

Use a SIPP and decide where to invest it yourself. The point is you can get money out of the company without tax liability, and the OP was looking to fund a pension and avoid high rate tax. A SIPP is a way to do that.

[mekondelta]

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?

Here is the accountant's reply:-

I believe you will be better using your personal funds to purchase a property or to set up a second Limited company and use your personal funds to fund this.
*
If you do this through a Limited company, you would need to write to companies house and HMRC to inform them of this. The company would not be able to claim for entrepreneur relief and the company will also incur the higher rate of corporation tax.
*
If for example, C1 Ltd wanted to loan C2 Ltd money to do this, C1 Ltd would also have to pay S455 tax on the loan it makes to C2 Ltd as it will be considered as a related party loan.
*
I am happy to do a couple of calculations for you if you wish to provide me with some scenarios, but I do believe it will be more efficient for you to do this personally. If this means more dividends to be taken from C Ltd this year and the additional tax on the dividends paid, it will still be more beneficial for you then losing the right to claim entrepreneur relief and paying S455 tax until the loan from one company is paid to the other.

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.

I don't mind paying tax. I just want a better return on the (already taxed) lump sum in the company account.

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.

Possibly yep, I'll look into that.

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.

Having no mortgage or leverage decreases my exposure to interest rates and lessens my exposure to house prices (arguable). I realise it's no panacea. Commercial mortgages are also more expensive.

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

Yep, possibly but I don't see why it's such a big issue and a no-no. I could invest the whole money in the stock market as far as I can see with no ramifications (Contractors' Questions: How to invest my company's leftover cash? :: Contractor UK ). As soon as a property is mentioned it feels like I'm already on the way to being investigated by HMRC. I just want the money in the company to grow.

[ContractorBanking]

I'll add a positive aspect to purchasing property in the company - depending on where you live and the prospects for growth..

Say house prices fall, which could be likely in the future if interest rates rise, then you can sell the property to yourself and *time* it to catch the bottom of the market. As long as you sell from C2 to yourself at "market rates" then you personally stand to benefit.

[tvr450]

See this article which is on the CUK home page, maybe worth a chat with Tony Harris?

The Summer Budget squeezes contractors may have missed :: Contractor UK

[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.

[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 !!

[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.

[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.