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Using a property company to rent out flat

Discussion in 'Home and Garden' started by Freefaller, 14 Mar 2016.

  1. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,181

    Location: Falling...

    Hi chaps,

    I'm sorely tempted to go down the route of starting a company so that we can transfer our rental property to it.

    From what I know (I haven't researched it so I may be wrong / out of date) it would be advantageous to transfer the ownership. I believe that the first £10,000 of profit a limited company makes is free of tax? Is that correct?

    The rent will be around £1,200-£1,300 - we are mortgage free, but after agent fees and everything the income will still be over £10k a year so this would help minimise the tax exposure.

    If we were to make a 10k profit on our rental income as a higher rate taxpayers we would have to pay £4,000, but if I understand correctly a company there is no tax liability up to 10k? Sure there will be corporation tax, but that is still less than if we took that as extra income - the extra income increases our tax liability up by more than double the corporation tax.

    As we are higher rate taxpayers I believe we would pay 40% on the profits? I believe that for a ltd. the tax rates are between 0-30% so even at the higher end is still a saving.

    Even with the cost of an accountant (my one charges around £500 - once a year) - I think this would be the sensible way to go.

    Or am I missing something obvious in the new laws?

    Appreciate feedback (constructive). :)
     
  2. TomO

    Mobster

    Joined: 28 Oct 2002

    Posts: 3,296

    off the top of my head:

    - there might be stamp duty cost to transfer to the company.
    - unless you want to keep rolling the money over in the company then you will need to pay it out to yourself, presumably as a dividend. you will need to look at how the dividend rates add to the total tax (potentially tax free with new £5k per person dividends allowance - split total dividend between two or more people)
    - dont think there is any £10k allowance on coroprate profits.

    when you say new laws, the big one it to do with mortgage interest and you say you are mortgage free. so this wont make any difference to you. just the wear and tear allowance changing starting next month.
     
  3. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,181

    Location: Falling...

    Thanks :)

    I believe stamp duty does not apply to transfer to company?

    A dividend income is a smaller tax liability than paying the full 40% I believe. We'd be using the money generated for maintenance, and for as and when overpay our mortgage on our main home, or use it for savings/rainy day fund.

    I will be speaking to my accountant though to go through this but wanted to see what you guys thought or if any of you have done it or do it?
     
  4. Rifte

    Mobster

    Joined: 17 Sep 2010

    Posts: 2,771

    Location: Somewhere in Asia

    I am very interested to see the outcome of this thread Freefaller.So please update when you decide what you want to do.

    I currently have a few properties in the UK, they are mortgaged, and currently as a UK expat I still get to keep my tax free allowance, as does my wife.

    I am aware though that this could potentially be snipped in the coming years with Osbourne's austerity plans. So it would great to look at an alternative if this happened.
     
  5. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,181

    Location: Falling...

    No problem. I'm going to speak to my accountant and solicitor and get an overview of what it will cost us vs what it will cost us if we do nothing and just stay as private owners.

    I am happy to hear of people's experiences and thoughts too so feel free to contribute :)
     
  6. Showboat

    Wise Guy

    Joined: 11 Sep 2009

    Posts: 2,041

    Location: UK

    Interested in this also! Keep us posted. I was looking at it for a way to pass property onto kids without inheritance tax.. Just make them directors of the company!

    When it sounds to good to be true it always is :(
     
  7. Felix

    Mobster

    Joined: 25 Jan 2003

    Posts: 2,702

    So who would be the share holders of said company?

    Don't forget corporation tax.
     
  8. SpeedFreak

    Soldato

    Joined: 14 Nov 2002

    Posts: 6,984

    Location: Bristol

    My concern would be that if you sold the property, any increase in value would be taxable at the corporation tax rate. It may be difficult to argue that it is your primary residence as you are not the owner, the newco is.

    I would therefore seek the advice of a competent tax specialist in order to fully understand potential downsides.
     
  9. Rifte

    Mobster

    Joined: 17 Sep 2010

    Posts: 2,771

    Location: Somewhere in Asia

    Cheers!

    I have no idea of what your property is worth, so stamp duty I cannot calculate. But if you rent out your place at 1250 a month (average of the two figures you gave). You will be picking up a tax bill of around 6k per annum at 40% (minus whatever you can deduct).

    Good bearing in mind in mind you will be picking up 15k in rent (minus deductables, but this can be tax deductable).

    I was under the impression that stamp duty will apply to transfer to a small limited company. But this might end up being cheaper in mid term/long term than paying 40% on your earnings each and every year. Just depends if you can upfront that much cash I suppose.

    Now with capital gains tax. I am no accountant, but if you are technically selling (you own it 100% so there is no lender involved)it to your own company couldn't you transfer it for the price you bought it at? Hence no CGT? Maybe I am way off the mark here.
     
    Last edited: 14 Mar 2016
  10. Hamish

    Mobster

    Joined: 14 Apr 2003

    Posts: 4,955

    Location: Deepest Yorkshire

    I'm pretty sure that it's not worthwhile to do this. HMRC is really cracking down on properties owned by companies.

    Showboat - If you want to pass property onto kids without inheritance tax the best thing is to set up a Trust for them and have the properties owned by it.
     
  11. Rifte

    Mobster

    Joined: 17 Sep 2010

    Posts: 2,771

    Location: Somewhere in Asia

    A number of years ago my parents set up their houses in trust for me and my brother. Effectively passing ownership over to us, we are not able to sell the house while my parents want to remain there. My parents could sell the house if they wanted a buy another house but if they downgraded any surplus would still be held in trust (which they couldnt touch) alongside the new house.

    If this status quo is maintained for 7 years (the length of time it is backdated).....zero inheritance tax once my parents pass away.

    This is what our solicitor has told us anyway....
     
  12. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,181

    Location: Falling...

    Maybe but that's why I'm waiting to hear back from my accountant. It's worth looking into. Heck, if I can save over 12k in stamp duty and taking into consideration charges/taxes vs income it may be worth it to save a few k is worthwhile.
     
  13. SeatIbiza

    Wise Guy

    Joined: 21 Jan 2008

    Posts: 1,221

    Location: Cotswolds

    I am pretty sure you would need to consider stamp duty.

    If, for example, you bought it now and registered it to a company rather than yourself you'd still pay stamp duty just as if you bought it...for you to transfer it to a company I believe is like a sale and you'd have to value it at the market rate.

    Obviously get advice as I'm not 100% sure on this but given they want to rob you blind every which way I doubt they've not got this in there!
     
  14. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,181

    Location: Falling...

    You're probably right which is why I'm getting advice :)

    Eitherway it's more about long term financial gain. The stamp duty will pay for itself in just over a year.

    However, if we do not do this and we miss the stamp duty hike for our family home (fingers crossed) I'm still interested in seeing if it is worthwhile using a company to rent the flat out. Just curious as to the pros and cons of doing this. :)