Subletting through a limited company

[Rabbot]

I have one flat which I rent out. I don’t make much from it due to the outgoing mortgage payments and higher rate income tax. A friend suggested an idea and I would like to know whether anyone has experience in doing this.

1. create a company and let the property to that company for a nominal rent 

2. The company will sublet it to the tenants at the market rate

3. Difference between the nominal rent and the rent paid by the tenant will be company’s profits. I, as the director, would pay 19% tax on it

4. I will  also pay 40% tax on the nominal rent received from the company but overall outgoing tax will be lower compared to the current arrangement 

Anyone doing it this way? Any pitfalls you can see?

 

[Grampa]

I like your thinking and am going to run that scenario via my accountant for his thoughts as I have some properties owned personally and some via a Ltd Co so would be a fairly easy set-up.

However the tenancy agreement between the legal owner and the Ltd Co would have to be a "company let" not a normal Assured Shorthold Tenancy which the mortgage company (if any) may not allow and the small print in any insurance policy would also need to be checked. 

 

[Richlist]

Flats tend to be leasehold. Often the lease contains restrictions on letting & /or require permission from the freeholder.

So there are 3 potential problems......mortgage lender, insurance and freeholder.

[Grampa]

Thinking about this a bit more and not professing to be any sort of expert but wouldn't any earnings/profit taken out of the Ltd Co be added to your tax return income and therefore taxed at the higher tax rate (if that's what you are already on). I understand a certain amount of  dividends can taken tax free but isn't that being reduced? You could also have the extra overheads/time involved in running/administrating  the Ltd Co.

You wouldn't get the tax relief of the mortgage payments because that would still be in the personal name.