Property via a limited company

[tim@rentaladvance.co]

If I set up a limited company to handle my property interests and loaned the company the relevant funds to purchase the properties would I be able to receive the rental income (after Corporation tax has been applied) without any income tax implications (as the rental income will effectively be treated as repayment of the loan)?

[accountant@uktaxshop]

Nice try Tim,

Although it isnt really my area, I believe loans between close companies and their owners are subject to strict regulation, and would in effect be treated like dividends. So I dont think so.

However using a Ltd Co. can work as a tax saving vehicle, depending on the rental values and the tax status of the parties involved.

The thing to look out for is the extra accounting and other fees that a ltd co will cost. Its also worth bearing in mind that higher rate tax payers will have to pay tax at 32.5% (less 10% tax credit) on their dividends, in addition to the corp tax. Mark, the "tax doctor" has a couple of articles on this site on this very tpoic it is worth having a look at.

The exit strategy also needs to be considered.

If you would like to talk ltd co tax, and have some numbers ran for you, please let me know.

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

[Ian McTernan CTA]

You also need to consider the gains realised on transfer of existing properties into the limited company, as these will be deemed to be sold to the limited company at market value, and also stamp duty.

The limited company vehicle may still be worth a look, but you need to discuss your entire stategy and affairs with a professional to determine the best course of action.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com

[John Day]

Tim
The monies you would advance to the company could be repaid to you, at any time, without income (or other) tax implications; it is effectively a "capital" transaction. The rental income would remain taxable in the company, however, and you would need to resolve the most tax efficient way of extracting those profits, most probably via dividends. You will need to be sure that this is the appropriate route for you considering your overall personal tax position and the likely "double charge" to CGT on a sale of the property(ies) by the company.

[tim@rentaladvance.co]

Hi John,

As you say, the rental income is taxable (at the applicable Corporation rate). However I'm talking about using the net rental income to repay the capital on the loan. If this can happen then it would obviously be the most tax efficient way to extract profits (i.e. no tax payable!)

James suggests that the capital loan repayment would be treated as a dividend (and thus taxed as such). Can anybody tell me if this is correct or not?

Thanks,
Tim.

[John Day]

Hi Tim
Firstly, the company is going to be liable to corporation tax (at whichever is the applicable rate) on the net rental income in any event. Secondly, in terms of extracting monies from the company, it is up to you (as director / shareholder) whether you take those funds as a (tax free) repayment of your loan account with the company or as dividends. Repayment of your loan account obviously has a limited duration - limited by reference to the amount originally leant by you. Payment of dividends COULD provide you effectively with a tax free income - for example if the company profits did not exceed £10,000 and you were not a higher rate taxpayer. There are many variations surrounding this (depending, as much, on your overall income position) and within this forum you are unlikely to achieve the detailed and finite advice you need - seek further advice from your accountant!