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    Switch to Limited Company Ownership

    Hi all,

    Apologies if this is a subject which has probably been covered to death in the last six months, however I am new to this site and after some advice on the following.

    I own one rental property, bought and rented out since 2010. I paid £125k for it and it is probably worth £140-150 now. Rental income is £6,000 per year. My marginal tax rate is now 40%.

    I am considering setting up a company, selling the property to this company, rewriting new the tenancy contracts to reflect the change of ownership, the company taking insurance etc, the company paying 20% corporation tax, and paying me a £5,000 tax free dividend (while it lasts) or simply leaving the profits retained within the company. The company would also owe me around £140k which could be repaid gradually, but I realise that as it does the shares I hold will gradually be worth more so tax will always be liable at some point in the future.

    The major cons of Limited Company ownership that I am aware of are that it is difficult to secure lending (not a problem as it is owned mortgage free and I don't see myself expanding the portfolio) and the annual paperwork, which I am not too concerned about as an Accountant.

    I understand I would be personally liable to CGT on the sale, but any gain would only be marginally above the £11k allowance. And that the company would be liable to SDLT of about £4,000 (which would not have been the case had I thought of this a few months ago!) But if it will save about £1,000 per year that would not take long to pay for itself.

    This seems to be a no brainer, am I correct or are there other things I have not considered?

    Thanks in advance.

    #2
    The trick with company structures is getting the money and property back out again.

    You can use dividends and director loans to stream income out while trading, but when you come to wind up the business / sell the property it's difficult to avoid the process being income, which can wipe out a lot of the previously "saved" tax.

    You might want to model the whole expected lifetime of the business to see if the savings overall are as expected. Obviously annual savings repeat and winding up is a one off so lifetime itself is a factor.
    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
      Not sure if your idea would work at all - I think the costs associated to having a limited company might outway any taxes due.

      Have you got the option of sharing the income with a spouse who perhaps is in the lower tax bracket?

      Comment


        #4
        Thanks for the replies guys, much appreciated.

        JP, is this not essentially just deferring the corporation tax into capital gains tax? Either way I don't really mind as it will be taxed at a rate which is less than half of my current marginal rate of income tax. Of course there is no way of knowing for certain whether this will always be the case, maybe CGT could be increased to 60% in the future but in the absence of a crystal ball the current situation is as good as we have to go on.

        Claymore, what are the costs associated with a Limited Company? Bear in mind that I will not need an Accountant, and the legal fees associated with the sale/purchase will be one off. All I can think of is the cost of submitting an annual return to Companies House which is about £20.

        My partner is also in the 40% tax bracket, if we have children in the future that may change, but it is my understanding that it would be far easier to transfer some of the shares to her than to change the deeds in any case.

        Comment


          #5
          Hi

          I can't be certain but I have read that on transfering property to limited companies you have to pay SDLT and you have bigger problems when selling the property as you will lose certain allowances. I don't have enough knowledge to comment any further on this. Sorry. The more knowlegable peops will be along sooner or later.

          Comment


            #6
            Thanks Claymore. I am going obtain a quote from a conveyancing firm today, I expect this to be high as I will effectively be paying both sides. On selling I won't have any allowances as an individual anyway as I have never lived there. The Capital Gains Tax allowance I will benefit from on selling to the company anyway as the market value is now higher than what I paid for it. Setting up a company only costs £15.

            Comment


              #7
              The risk is that the company profit is taxed at 20% (soon to be 18%) but the income you draw will be taxed at 40%, which is actually more tax.
              As a higher rate tax payer your CGT is 28%.

              There are changes in the treatment of tax for investors with more than 5% of a business that's wound up to consider.

              But if the sums work for you (and you're an accountant), go 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


                #8
                Originally posted by jpkeates View Post
                The risk is that the company profit is taxed at 20% (soon to be 18%) but the income you draw will be taxed at 40%, which is actually more tax.
                As a higher rate tax payer your CGT is 28%.

                There are changes in the treatment of tax for investors with more than 5% of a business that's wound up to consider.

                But if the sums work for you (and you're an accountant), go ahead.
                Thanks JP, I don't envisage taking any income out while I am working and paying a marginal rate of 40%, except for maybe a small amount dividends provided it is tax efficient.

                Comment


                  #9
                  Hi PDog, I think most of your logic makes sense. The points above about getting funds out of the company eventually are worth thinking about. Take a look at a post I made on this topic over on AWeb: http://www.accountingweb.co.uk/anyan...on-legislation

                  Gets a bit technical, but best guess right now is that selling the property and winding up should allow you to get the funds out as capital and thus subject to CGT (at 20% currently).

                  So your plan to pay £5k dividends a year makes sense, and any annual profit after tax of more than 5k can be used to repay your loan of 140k to the company. Be careful though that you have sufficient distributable reserves each year to make the dividend payments.

                  Only other thought, if you're married, gift 50% of the property to your wife before you jointly flog it to the company, then you have two annual CGT allowances to use which should cover any gain.

                  Comment


                    #10
                    Originally posted by flash_uk View Post
                    Hi PDog, I think most of your logic makes sense. The points above about getting funds out of the company eventually are worth thinking about. Take a look at a post I made on this topic over on AWeb: http://www.accountingweb.co.uk/anyan...on-legislation

                    Gets a bit technical, but best guess right now is that selling the property and winding up should allow you to get the funds out as capital and thus subject to CGT (at 20% currently).

                    So your plan to pay £5k dividends a year makes sense, and any annual profit after tax of more than 5k can be used to repay your loan of 140k to the company. Be careful though that you have sufficient distributable reserves each year to make the dividend payments.

                    Only other thought, if you're married, gift 50% of the property to your wife before you jointly flog it to the company, then you have two annual CGT allowances to use which should cover any gain.
                    Thanks flash, unfortunately I am not married, but I have obtained a quote from a solicitor of £495 + VAT. They also recommended obtaining a few valuations as supporting evidence of the transfer being at market value in case it were to ever be challenged, which makes good sense. I am not too concerned about CGT as I would have to pay it at some point, but SDLT is the annoying one, especially since it would have only amounted to a few hundred pounds before last week. By my calculations it will take 4 years for the tax savings to make this back.

                    I am a bit sceptical about making calculations over a 30 year period on the assumption of current tax rules (eg £5k dividend allowance). But my gut feel is that it is more likely that future chancellors will target individuals and individual landlords more than companies and company landlords, as the later would include housing associations etc.

                    I will read the discussion about taking funds out of a company, thanks.

                    Comment

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