Benefits of creating a Ltd for my portfolio

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    Benefits of creating a Ltd for my portfolio

    Apologies of this is in the wrong forum - please move if needed.

    So full disclosure to alleviate any questions. I currently own four properties - my own home, my Mum and Dad's house and two other house's that are rented out. All four properties are mortgage free. My own home and the two renters were purchased as joint tenants with my wife and the income received each year is split 50/50 for tax purposes.

    I am currently in a position to purchase another one, possibly two more properties (in cash).... and potentially another two or three in a few years (due to some family money that should come through and the accrual of rent).

    My wife and I work part time as well; I earn approx £12,000 and she earns approx £5,500 from our "proper" jobs. This combined with the rental income means I earn approx £18,800 and she earns approx £12,250.

    We are both on unique tax codes because of our jobs and the expenses we accrue meaning we can earn £16,000 a year each without paying tax.

    I foresee a time where we own upwards of 6,7,8 properties.... and as we purchase more and accrue more rent, I will reinvest the money in more property as time goes on until this is in essence our family "business" (which it already kind of is now really).

    So the most obvious question I'm to ask is, Should I be looking at creating a Ltd Company either now or in the future if I am expecting to amass such a quantity of properties? What or when will trigger the decision to do so?

    I have read that it isn't worth it until you are earning £35,000 or more..... and that the problem with creating a Ltd too late is that you can't simply transfer your properties into it; the Ltd has to buy them? Is that correct?

    Anyone with any insight would be much appreciated. Happy to answer or clarify any questions.

    Thanks...

    #2
    Transfer into company is a CGT event. It is not "too late" - it just costs (however that CGT crystallisation may in fact be a benefit when Corbyn raises CGT to 50% with no exemptions or allowance - on the other hand property prices might decrease by 50% reducing any CGT tax revenue)

    Whether property will be a viable business remains to be seen. I would stick with the day job. Most landlords who intended this to be their day job are slimming down portfolios (at the moment) not increasing them. be careful..

    Comment


      #3
      Originally posted by AndrewDod View Post
      Whether property will be a viable business remains to be seen. I would stick with the day job. Most landlords who intended this to be their day job are slimming down portfolios (at the moment) not increasing them. be careful..
      May I ask why in your opinion it wouldn't be a viable business? If the properties are owned outright with no debt associated with them then as long as there are people that need somewhere to live then I have a business model. I'm not constrained by having to earn £X in rent to cover the mortgage payments etc so I am in someways "free", if you see what I mean. Or am I missing something very obvious?

      Comment


        #4
        Originally posted by RedHitman View Post

        May I ask why in your opinion it wouldn't be a viable business? If the properties are owned outright with no debt associated with them then as long as there are people that need somewhere to live then I have a business model. I'm not constrained by having to earn £X in rent to cover the mortgage payments etc so I am in someways "free", if you see what I mean. Or am I missing something very obvious?
        The way business models end up (and this model in particular) depends on what politicians do. That determines later capital value, costs, income and risk.

        Comment


          #5
          The advice I always give to prospective clients seeking ways to maximise income derived from property investment is to seek the advice from a suitably qualified Chartered or Certified Accountant. It is their sage advice on which you can make a considered judgement call.

          Comment


            #6
            Originally posted by AndrewDod View Post

            The way business models end up (and this model in particular) depends on what politicians do. That determines later capital value, costs, income and risk.
            Thanks for that.

            Going back to the original question, do you think it’s something I should consider doing (creating a Ltd)....? And could you just explain the CGT aspect you mentioned please?

            Comment


              #7
              Originally posted by RedHitman View Post

              Thanks for that.

              Going back to the original question, do you think it’s something I should consider doing (creating a Ltd)....? And could you just explain the CGT aspect you mentioned please?
              You are effectively selling the properties to the company. This results in capital gains tax event (which might be a good thing or a bad thing depending on what you think might happen to CGT rates in the future). But if you do it all in one go it might result in a big capital gain all in one tax year, on which you might end up paying a lot of tax (tens or even hundreds of thousands of pounds in tax). If property prices later fall, you will end up having paid the tax even though prices (and gain) are reduced. If prices rise, you can save tax (if tax rates later increase, and also by splitting the gain in two parts).

              Comment


                #8
                Originally posted by AndrewDod View Post

                You are effectively selling the properties to the company. This results in capital gains tax event (which might be a good thing or a bad thing depending on what you think might happen to CGT rates in the future). But if you do it all in one go it might result in a big capital gain all in one tax year, on which you might end up paying a lot of tax (tens or even hundreds of thousands of pounds in tax). If property prices later fall, you will end up having paid the tax even though prices (and gain) are reduced. If prices rise, you can save tax (if tax rates later increase, and also by splitting the gain in two parts).
                Thanks for your replies.

                I’d read this online but I’m still unsure how the logistics of it work. How does the Ltd “buy” the properties when it was zero money to do so? And thus how would I be able to pay a huge CG bill when I wouldn’t have the money to pay it as I’ve not received any money?

                Apologies if I sound stupid and naive! I don’t quite understand the process...

                Comment


                  #9
                  Originally posted by loanarranger View Post
                  The advice I always give to prospective clients seeking ways to maximise income derived from property investment is to seek the advice from a suitably qualified Chartered or Certified Accountant. It is their sage advice on which you can make a considered judgement call.
                  This is indeed my plan. Just wanted to have a rough idea of the process first. Thanks.

                  Comment


                    #10
                    Originally posted by RedHitman View Post
                    I’d read this online but I’m still unsure how the logistics of it work. How does the Ltd “buy” the properties when it was zero money to do so? And thus how would I be able to pay a huge CG bill when I wouldn’t have the money to pay it as I’ve not received any money?

                    Apologies if I sound stupid and naive! I don’t quite understand the process...
                    Typically, the properties are transferred into the company without money actually changing hands.
                    You loan the company the value of the property and the tax etc is based on what the property should have been worth (that's why you need an accountant!).

                    The company pays SDLT on the transaction and you are taxed for any capital gain on disposal.

                    That would be a real bill, so you'd have to pay it - one of the reasons this isn't done in a lot of cases.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Originally posted by loanarranger View Post
                      The advice I always give to prospective clients seeking ways to maximise income derived from property investment is to seek the advice from a suitably qualified Chartered or Certified Accountant. It is their sage advice on which you can make a considered judgement call.
                      Absolutely. Forums can only give very general advice. A tax professional can give advice tailored to your personal circumstances and requirements.

                      Comment


                        #12
                        Originally posted by jpkeates View Post
                        Typically, the properties are transferred into the company without money actually changing hands.
                        You loan the company the value of the property and the tax etc is based on what the property should have been worth (that's why you need an accountant!).

                        The company pays SDLT on the transaction and you are taxed for any capital gain on disposal.

                        That would be a real bill, so you'd have to pay it - one of the reasons this isn't done in a lot of cases.
                        Thanks for this.

                        I’ve just spoken to a retired lawyer (a family friend) who is the director of multiple businesses and he said another way to do it would be for the company to “purchase” the assets (property) in exchange for shares in the company. So no money changes hands and thus no CGT would be due from me as an individual. Over time I can then cash out my shares, bit by bit to release the funds of the purchase and at that point I’d pay tax on the dividends/shares.
                        Does that make sense?!

                        Comment


                          #13
                          Originally posted by RedHitman View Post
                          Does that make sense?!
                          No, it doesn't - but that doesn't mean it's not right!

                          That no money changes hands doesn't stop it being a CGT "event" for you as the seller.

                          You can't trade (what's typically) £100 of shares for a property worth (I imagine) tens or hundreds of thousands of pounds, without the sale being taxed at market value.

                          I also don't really understand how you can "cash out your shares" bit by bit? Who are you selling them to?

                          I think you need to walk this through with an accountant - moving property into a limited company isn't unusual, but whether or not you should do it isn't something I can posssibly answer, although I'm happy to try to answer specific questions about the mechanics.

                          I spent a lot of time investigating this for myself a while ago, because the changes in law and tax meant that it would have been a better structure for us, but the pay back in reduced tax and costs took too long to kick in which meant that the cost of change was more than we could realistically afford.


                          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                          Comment


                            #14
                            Oh and one tip I did learn.
                            It can be quite expensive to shut down a company (and it does cost a bit to administer).

                            So when you're considering the cost of change, don't forget to consider including the close down costs as well.
                            In my case, they weren't trivial.
                            When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                            Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                            Comment


                              #15
                              Originally posted by jpkeates View Post
                              No, it doesn't - but that doesn't mean it's not right!

                              That no money changes hands doesn't stop it being a CGT "event" for you as the seller.

                              You can't trade (what's typically) £100 of shares for a property worth (I imagine) tens or hundreds of thousands of pounds, without the sale being taxed at market value.

                              I also don't really understand how you can "cash out your shares" bit by bit? Who are you selling them to?

                              I think you need to walk this through with an accountant - moving property into a limited company isn't unusual, but whether or not you should do it isn't something I can posssibly answer, although I'm happy to try to answer specific questions about the mechanics.
                              Definitely will be seeing an accountant!

                              The “cashing out shares” bit was described to me as follows;

                              I transfer my portfolio to company X in return for the value of the portfolio (let’s say £500k) but in shares. So no cash changes hand. I now own £500k worth of shares in company X. I can then sell/cash out my shares at whatever rate I want. I would pay tax on the shares that are cashed out.

                              No?

                              ps thank you for all of your replies!

                              Comment

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