Reply to: Buying a property as a contractor

[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.

[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.

[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.

[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.

[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]

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...

[simes]

Re.

Yes, I have a BTL through my Ltd. The rent is zero VAT rated and I was advised to deregister from Flat Rate.

There are pros and cons to buying through Ltd or Personally. I have a mix of both and the main reason I bought through Ltd was because by the time this flat came up for sale, I was already at the 40% tax rate so for the 35% deposit required, I would have incurred a £30k tax bill the following year.

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.

[Jessica@WhiteFieldTax]

+1 on Wanderer's and Craig's input - IME, although tempting, its nearly always better in the long run to keep BTLs away from your company. Sorry.

[Wanderer]

why not just take a loan from your ltd?

You could but you get hit with a 25% charge 9 months after your company year end and you only get it back when the loan is repaid.

See Corporation Tax implications of overdrawn directors' loan accounts.

As you point out, you have to pay interest too and this would stack up after 20 years. It cost be more than 1% too because it looks like the original poster is a higher rate tax payer.

Perhaps a MVL and capital distribution is the best way to get the money out of the company?

[ChimpMaster]

I just thought about something (at nearly 2am...) : you're looking to buy the BTL property for cash, so why not just take a loan from your ltd?

You would pay a market rate of interest on the loan, 4% or whatever, but that is paid back into your ltd (taxable as profit).

The advantage is that you are using money from your company and buying the BTL in your personal name. Best of both worlds.

I'm quite confident this is feasible but do get it checked out with your accountant.

[Wanderer]

Rental income (from residential property) is exempt from VAT - if the company was to take on a rental property you would not charge VAT on the rents, however as exempt supplies form part of your Flat Rate turnover you would need to pay over Flate Rate VAT which would not be cost effective.

Ahh that makes sense now. Thanks Craig!

[Craig at Nixon Williams]

Rental income (from residential property) is exempt from VAT - if the company was to take on a rental property you would not charge VAT on the rents, however as exempt supplies form part of your Flat Rate turnover you would need to pay over Flate Rate VAT which would not be cost effective.

The easy way round this is to de-register from the Flat Rate Scheme (which you have said you will be doing anyway) - if you do this you will be able to reclaim VAT on the inputs relating to your consultancy work, however VAT could not be reclaimed in respect to inputs on any exempt supplies (the rental income).

[Swampydrill]

Thanks for the replies, my accountant confirmed that residential properties are exempt from VAT but as i am flat rate registered i would pay VAT on the rent, he also confirmed that the corporation tax limit is split by the 2 companies so chaurrently £150k profit allowed through each company before higher rate, i would just get inside that as it is actual profit. Is probably better to set up a different company i think rather than use savings to buy as do not want another mortgage, just paid off last one.

[ChimpMaster]

Be aware of the "associated companies" rule if you set up a separate company. It could mean that you end up paying higher corporation tax rates on your contracting income. This was the reason I didn't buy a property through a Ltd Co.

It's a ridiculous rule, not suprising from HMRC I guess.

See:-
Associated Companies and Corporation Tax

[Wanderer]

Some of my colleagues have BTL through their existing LTD company set up

Lots of discussions here have concluded that this isn't a good idea. Primarily around the cost of a BTL mortgage to a LTD company (doesn't apply to you as you are a cash buyer), your company could get hit for Capital Gains Tax when you sell (could potentially be avoided if you brought it personally) and your company ends up with substantial assets if someone (HMRC/disgruntled client) should try and take action against your company.

my accountant says as i charge VAT I would also need to charge VAT on any rent

My understanding (possibly wrong) is that rent on a residential property is VAT zero rated so ask your accountant to clarify this point. Or are you talking about a commercial property?

he suggested setting a new company up ( for which he would charge £400 yearly to do the books ).

£400/year is not much to be honest! It also means that your property and other businesses are ring fenced with LTD liability if anything should go wrong with one of them.

How would the money transfer though? Would one company invest in the other one? I don't know how that would impact the ring fencing of the different businesses...