Limited Company for Buy to Let

[Sam12345]

<t>Please consider the following scenario:<br/>
A owns a buy to let with a market value of £100,000, free from mortgage. He wants to sell it to a newly formed limited company (X) for the various benefits that normally accrue from holding in a limited company. A would lend X the price, for the sake of simplicity interest free. The cgt payable by A on this sale, based on a disposal at that market value, would be too small to be a problem for him.<br/>
Going forward, a downside of such an exercise, however, seems to be that the future rental profit when it reaches the hands of A as dividends, has been subject both to corporation tax and to the higher rate dividend tax. The total of such tax will be more than the straightforward higher rate income tax payable by A if A still held the property as an individual.<br/>
The after corp tax rental profit could however be paid to A as part repayments of his loan ie without liability to dividends tax. After the loan is repaid in full, however,A would presumably have to take the rental profits as dividends, taxed as above.<br/>
CG14530 and TCGA92/s17 & 18 say that if the parties are connected then the figure to be used for (capital gains) tax is the market value. A and X are connected. This is probably normally relevant where the price paid is an undervalue, for obvious reasons, but it does not say that that has to be the case, so seems to also apply if the price paid was more than the market value. If the price paid (and hence also the loan) were in fact say £200,000, the loan repayments to A could be made up to £200,000, with no dividends tax on those. A's cgt would still be based on the market value of £100,000. This would be a substantial (dividends) tax saving.<br/>
CG14530 applies to capital gains, and although not specifically made applicable to corporation tax as well, presumably a subsequent sale of the house by X would be at a profit computed on the price realised then, less that market value of £100,000 (not the £200,000 actually paid), so that profit (and hence the corp tax payable on that disposal) would be more than if it was based on the price of £200,000. Essentially X is paying more corp tax on that disposal because less cgt was paid (by A) at the start.
X Balance Sheet would presumably need to show an asset of £100,000 (the market value) and a liability of £200,000 (the loan) ie a negative overall position.<br/>
This seems to be a good way to go about this, but am I missing something please ?</t>

[someone]

SDLT?

[Sam12345]

Thank you. I had not thought of that. It seems SDLT is charged on the market value, not the consideration passing, so should be nil anyway

[AGoodman]

Not an expert on corporation tax but google sources suggest that if the company buys an asset from shareholder for a price over market value, the excess would be treated as a distribution and so taxed as a dividend. The same with a director/employee could be treated as employment income (so IT and NI).

That makes perfect sense as otherwise it would be an extremely simple way of extracting value from a company without incurring tax.

[AGoodman]

s.1020 Corporation Tax Act 2010

[Sam12345]

Thank you. I will look into this