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BTL Personal Ownership to Ltd Co


Grampa

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Now as we know there are some advantages to owning a BTL in a limited company, tax saving being a big one especially if you are a higher rate tax payer.. The question pops up in the industry on a regular basis on how to transfer a property currently owned in personal name to a Ltd Co but a big hurdle is the stamp duty that would be needed to be paid wiping out any savings.

Well here's a thought and I dont profess to be any tax expert but what if you rent your personal BTL at a greatly reduced rent to your Ltd Co which then is rented out at the normal rent with the Ltd Co as the landlord. Is there a potential tax saving in doing that?

 Other than possible Mortgage Co and Insurance Co restrictions on renting to a Ltd Co (if any) and the extra cost in running Ltd Co what else am I missing? Or is this a silly question.

 

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Well above my pay grade to answer this question Grampa but I would expect HMRC will have this covered and to give you an example of this:

If you leave or sell your primary residence to a member of your family under the 7 year rule of passing property on to escape Inheritance Tax obligations and that selling family member then rents the property from the buying family member then the rent paid must be at market value and not a peppercorn rent AND you have to have financial records to show this.  HMRC normally have all situations covered and probably what you are asking as well.

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I've given this some thought and can't see a problem but, I'm no expert either. It's the sort of query that would be raised on another forum.....it may already have been raised there but I can't be bothered to search. Try looking here : property118.com

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It was my accountant that mentioned this as a possible solution (but would need to be looked into further) when I was complaining about a tax bill. 

As my last 2 purchases were via a Ltd Co and my earlier BTL purchases  still in my personal name it does appear on the face of it to be a straightforward fairly easy task to just draw up a company let tenancy from Mr & Mrs Grampa to Grampa Properties Ltd with a guaranteed rental payment of say 25-30% of the normal rent to cover the mortgage payments. Then Grampa Properties Ltd to rent out the property at the market rate and be subject to the lower Limited Co tax rates.

Rent to Rent Guaranteed rental payments are acknowledged to be quite a bit less than the going rent (maybe not as less as I'm hoping to do though) and Rent to Rent isn't an unusual practise either.  

Melboy I take your point but I wont be selling or gifting the property and the Rent to Rent tenancy would likely be 6 months than going periodic. 

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So let's get into a bit more detail.....

Note: I have no knowledge of how company lets work.

Mr & Mrs G do a company let to Ltd Co. They would need to check mortgage & insurance conditions allow ......a) company let & b) below market rate. If ok, are all allowable expenses (mortgage, insurance, ground rent, service charge, maintenance etc) paid by Mr & Mrs G ? Presumably they would set the rent below the rate at which tax became due resulting in no tax liability ?

But, the Ltd Co would have little or no allowances to offset against income.....perhaps some letting fees & utilities during voids so would pay corporation tax at the current rate of 19%........which Is due to rise to 25% next year.

Is that how you see it ?

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Well in my limited knowledge of taxation and my back of a fag packet calculation based on a rental currently achieving £700 pcm and running costs of £200 pcm (mortgage S/C, GR agent fees etc)

A high rate tax payer (40%) rents property to Ltd Co (which he also owns) for £200 pcm  which pays the owners overheads but makes no/little profit so no 40% tax liability on the £500 profit he would have received previously.

The Ltd Co now rents the property to a tenant for £700 but has to pay £200 to the owner and therefore makes £500 pcm profit with 19% tax liability (until increase)   

 So very simplified, based on the £500 pcm profit instead of previously paying £200pcm (40%) tax it has been reduced to £95pcm (19%) tax giving a saving of £1260 per year. 

I would guess a bit more thought needs to go into which party pays for any maintenance works to maximise any tax saving.  

 

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3 hours ago, Richlist said:

So let's get into a bit more detail.....

Note: I have no knowledge of how company lets work.

 

A company let is a common law tenancy where a Assured Shorthold Tenancy (AST) cannot be used. In this case because the tenant in the contract between owner and Ltd Co is not an individual but a company. The main advantage is the deposit doesn't need to be protected and i think the notice period is reduced and eviction process slightly different. 

The main down side is you cant use a section 21 but as we all know they are being phased out anyway. 

 

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There is talk in today's newspapers of corporation tax being reduced to 12.5% next year to help the economy, stimulate  growth, help the jobs market etc.

On your example this would increase savings from £1260pa.....to £1650pa.

Looks even more attractive now.

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Grampa I might have misunderstood your intent.

But the agreement, whatever that is, between yourselves as individuals and the company (the fact you have control of the company is irrelevant in legislation) means that is all in house and can be designed and adjusted as desired (within HMRC parameters).

The result of that is that as individuals 'a' company rents from you. The company pay you a rent for which you will be assessed for tax.

The company is allowed to let on the property to 'another'. That agreement of tenancy is likely to be an AST. All relevant legislation such as deposit protection should be adhered to. The company shall then be assessed for the rental income it receives.

You desire that your taxable profit is low. You desire that the company enjoys the majority of profit and pays a lower percentage tax (than you might) on that profit. I think you have suggested that the company pays a somewhat reduced rent and that is justified by it being a guaranteed rent. And in fact if that meant you happen to run this particular agreement at a personal loss then that would reduce your portfolio profits. To that end you are better being responsible for overheads and ongoing expense's.

Any repossession of an AST tenant is for the company to concern itself with (as it is the companies tenancy), can the company use a S21? Either way it is being removed from England soon enough anyway so may be irrelevant.

Requires your accountant to clarify feasibility.

Are there mortgage issues?

Surely insurance is easy to obtain.

Have I understood your intent anyway?

 

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Yes that

1 hour ago, Carryon Regardless said:

Grampa I might have misunderstood your intent.

But the agreement, whatever that is, between yourselves as individuals and the company (the fact you have control of the company is irrelevant in legislation) means that is all in house and can be designed and adjusted as desired (within HMRC parameters).

The result of that is that as individuals 'a' company rents from you. The company pay you a rent for which you will be assessed for tax.

The company is allowed to let on the property to 'another'. That agreement of tenancy is likely to be an AST. All relevant legislation such as deposit protection should be adhered to. The company shall then be assessed for the rental income it receives.

You desire that your taxable profit is low. You desire that the company enjoys the majority of profit and pays a lower percentage tax (than you might) on that profit. I think you have suggested that the company pays a somewhat reduced rent and that is justified by it being a guaranteed rent. And in fact if that meant you happen to run this particular agreement at a personal loss then that would reduce your portfolio profits. To that end you are better being responsible for overheads and ongoing expense's.

Any repossession of an AST tenant is for the company to concern itself with (as it is the companies tenancy), can the company use a S21? Either way it is being removed from England soon enough anyway so may be irrelevant.

Requires your accountant to clarify feasibility.

Are there mortgage issues?

Surely insurance is easy to obtain.

Have I understood your intent anyway?

 

Yes, that is what I was mulling over and feasibility of. However, the profit generated within the Ltd Co (after tax) still needs to be be taken out at some point from the Ltd Co and how that is done also needs some thought because if is classed as personal income it would be declarable therefore defeating the whole excise. Though I acknowledge a certain amount of dividends can be taken tax free.   Or the profits put towards the deposit on the next purchase brought by the Ltd Co. 

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44 minutes ago, Grampa said:

Yes that

Yes, that is what I was mulling over and feasibility of. However, the profit generated within the Ltd Co (after tax) still needs to be be taken out at some point from the Ltd Co and how that is done also needs some thought because if is classed as personal income it would be declarable therefore defeating the whole excise. Though I acknowledge a certain amount of dividends can be taken tax free.   Or the profits put towards the deposit on the next purchase brought by the Ltd Co. 

You've given me some thought on the dividends.

A Co can take and lose directors at will as I understand. Directors have possibility of taking some dividends free of tax, up to a threshold each year. So if I understand correctly, a co will pay profits on tax in the year it is achieved, it can sit w/o tax consideration after that as co funds.

In later years it might be director/s could enjoy drawing down those funds as dividends. Some research as to if this is then additional to a directors personal income, or a capital gain, seems worth while.

Is this  a legal way to transfer to the kids, for example?

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5 hours ago, Carryon Regardless said:

You've given me some thought on the dividends.

A Co can take and lose directors at will as I understand. Directors have possibility of taking some dividends free of tax, up to a threshold each year. So if I understand correctly, a co will pay profits on tax in the year it is achieved, it can sit w/o tax consideration after that as co funds.

In later years it might be director/s could enjoy drawing down those funds as dividends. Some research as to if this is then additional to a directors personal income, or a capital gain, seems worth while.

Is this  a legal way to transfer to the kids, for example?

My understanding is by have a property in Ltd Co changing the ownership is simplified and anyone can be made director/shareholder. However, the mortgage company if any may require another guarantor. Owning a property this way may make it easier to transfer than the normal probate procedure if a property is owned in personal names.  

It also appears to be a fairly common practise for owners of Ltd Co to add family members as directors/shareholders to make benefit of their personal tax allowance if its not being used.   The legality of that I'm not going to go into. 

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My understanding is that company profits are subject to corporation tax. Dividends are paid from company profits after corporation tax has been paid. The dividends are free from personal income tax up to £2K pa.

If you are each taking £2K pa out of profit there isn't going to be much left in the Ltd company to worry about.

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