On cusp of buying my first flat...advice re tax structuring please!

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    On cusp of buying my first flat...advice re tax structuring please!

    At the grand age of 47, I am about to buy my first buy to let property a one bed flat in cash..... partly because there is only 67 years on the lease so it would be difficult to get a mortgage ...I am hoping to resolve this with the other leaseholders when I acquire the flat and may be able to release a mortgage once the lease is extended.

    I'm currently out of work and have been for last 10 months but about to start a new position (which may or may not work out as probation for 6 months) that will put me just in to the higher rate tax bracket. I have no debts but I'm trying to get a good return on my £100,000 savings and have decided that the best way to do this is probably to spread my risk across shares and a small one bed flat. The current rates for savings accounts have been low for some time as I'm sure many of you know.

    I plan to keep the flat for some time and if it works out well, potentially add to make a small portfolio. My preferred route doing this would be to release some equity on this one bedroom flat if and when this is possible. Medium or long-term I do not see myself working in the higher rate tax bracket for more than another 10 years or so. I would like the properties to support me in my retirement.

    I have read elements of this website and seen various advantages and disadvantages for purchasing property and letting it out using a limited company. I have not completed the documents for purchasing this flat yet but I'm very interested to hear people's thoughts on how my position is currently given the recent changes for tax relief on interest etc. Have also read that it may be difficult for me to get mortgages and release equity on the one bed flat if I am a limited company; am also aware that their interest rates charged could be higher.

    I need to work out the best "way" to purchase this flat very quickly as I need to inform the solicitor early next week. I also plan to buy “Using a Property Company to Save Tax” but will not have time to read this before I need to make my decision. I would appreciate any advice or suggestions on anything surrounding my situation as it is all new to me and am aware that it may not be a straightforward answer whether to buy privately or through a limited company due to the amount of different rules and tax rates that are always subject to change. Looking forward to reading some replies especially from people in a similar situation.

    Thank you in advance

    #2
    I can't imagine that you or your limited company would get a mortgage unless you've been employed for a few months anyway.
    The limited company would need personal guarantees, and you wouldn't be able to support them.

    If it were me, I wouldn't spend a penny of my savings until I was employed and confident in my future (as much as its possible to be).
    I don't know how much income you expect to get from the rent, but it would be nothing against the cost of borrowing if things don't work out.

    You'd need an accountant conversant with your situation to advise on personal vs company, the proposed tax changes on BTL tax relief mean that a definitive calculation may not be possible until the finance bill has actually passed.
    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


      #3
      Probably not the wisest move to risk all your savings in this uncertain market.

      Comment


        #4
        Sorry guys, I should have been clearer. I do have other savings (Premium bonds, fixed term savings accounts, etc). The main reason I am buying is that I cannot see me losing money on the flat as its a cheap repossession so I have an option of renovate, extend lease and sell on. My main intention however is use option to let out (assuming I do not need cash) as potential medium/long term investment strategy but wanted to maximise my tax efficiency set up, hence the question(s).

        Comment


          #5
          There are two different options there.

          If you're buying, doing up and selling on, you're developing property, and the gain would be income. That would tend (generally and not always) to favour a company wrapper for the transaction.
          If you're buying, doing up and renting, you're investing in property, the rent is income and for a private investor any gain on sale is capital gain, and for a company it's revenue. That could go either way.
          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


            #6
            Thank you that's the kind of response I'm after given the timing involved! It sounds like I need to be clear of my intentions i.e. make a firm decision quickly on this then....can you expend on why a company wrapper suits the buy, renovate and sell on approach please?

            Is it because the purchase cost, cost of renovation all come out before I make hopefully a profit on the sale ---- this net profit is then taxed at corporate rates and not capital gains? I think there will be about £30k profit roughly... Also how would I get the money out of the company?

            Comment


              #7
              You need an accountant, because it's hard to give specific advice without knowing a lot more about your finances and time scales.
              And setting the company up right is important.

              You're on track with the company situation, corporation tax is less than CGT for a higher rate tax payer.
              You can use dividends or wind up the company up at the right point to get the optimum tax position.
              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


                #8
                Corporation Tax is the same whether it's revenue or capital - currently 20% from 1 April 2015, but reducing to 18% from 1 April 2020. Indexation is still available to a company but not an individual - this may be better than the AEA for longer term investors.

                Dividends may be less attractive following the Budget.

                Comment


                  #9
                  Thank you so far....after speaking to a few people and reading articles and comments here it would seem in my situation there is no straightforward answer although I am leaning towards setting up a 1 man company at present. The preferred route would probably be as follows with some rationale:

                  1. Buy the flat as an individual (or a couple if can get my girlfriend to agree!)

                  2. Renovate the flat (should only take 1 or 2 week max)

                  3. Either before the short (65 year) lease issue is resolved/extended or after, transfer the flat into the new property company I set up. I have no real idea on how long this lease issue will take to resolve as there are a few complications and also some work is required on the external parts of building. I understand this property transfer will require an up to date valuation of the flat and very possibly/hopefully lead to a capital gains tax liability which can be spread across my/our annual joint CGT allowances of c. £22k or mine of c.£11k. Once the lease is resolved my estimate is a £20 to 30k net profit realised at this stage.

                  4. Let out the property through the co. with the revenues going in to the company accounts which allows me to draw down the money as and when I need it…..potentially when retired or as a lower rate taxpayer.

                  5. If I can remortgage the flat in the company’s name, I can hopefully get a fairly short (15 year) repayment mortgage which would/could allow the rental of payments to be a pension for me unencumbered by mortgage payments in the future i.e. receive personal payments by way of a dividend.

                  6. This could also potentially free up some capital for me to buy a BTL again in the future if I so decide?

                  Anyone care to criticise and pick my plan apart...keen to know how easy it will be to get a mortgage in my company name and gear up....grateful for any constructive criticism as I'm learning fast.

                  Comment


                    #10
                    As I have stated before in these forums, a company is currently my default position for higher rate taxpayers who do not need to extract the profits immediately to live on. However, that does not mean it will end up being my recommendation.

                    You seem to have overlooked SDLT - often worse than CGT on incorporation/transfer.

                    Comment


                      #11
                      If the goal is a pension, have you considered using an actual pension fund to buy some commercial property or land to rent directly?

                      Your plan over a long period paying down the loan and capital is one scenario where a company is more appealing and annual dividends can be set at "appropriate levels" after the business has broken even for 15 years.
                      If, by then, you're not a high rate tax payer, the company can pay you a low salary as director to extract funds in parallel.

                      Business BTL mortgages are usually at a higher rate than personal BTL and (I think you'll struggle with the personal guarantees required right now).
                      So you need to do the sums - because 1% on a mortgage interest rate is going to cost a lot more over 15 years than a few percent in tax (but might be mitigated by a repayment rather than interest only approach).
                      Long excel session ahead.
                      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


                        #12
                        With 67 years left on lease, you need to download the free guide on lease extension from www.lease-advice.org and study the procedure .

                        Comment


                          #13
                          Thank you. I believe there is a chance on my 67 year lease that I have a share of freehold with another flat owner in the block...bizarrely in a block of 3 flats, the other flat is not named as a freehold sharer. Does anyone know I have to wait 2 years to start process of extending the lease or can I start immediately?

                          Comment


                            #14
                            Found out today that there is no court order on the flat I'm buying just a request from lender but from a search found the old owner of my flat was the 50% owner of freehold. BUT they are now absent (due to repo I assume!) and the lender has not acquired a court order so freehold is still in their name. So it appears I need to apply to get my name put on freehold with an absent freeholder...so from what I have been told I am in for a tricky & costly time as no solicitor seems keen to quote! ...anyone got any experience of this and/or rough ideas of time/cost to resolve?

                            Comment


                              #15
                              The mortgage lender can re-possess the flat if mortgage payments are not kept up to date because the title is used as security for the mortgage loan.

                              But if the former ;leasehold still owns 50% share in the freehold title, he is not obliged to pass it FOC to next owner of the flat. So beware.

                              Comment

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