1. Through your company
If you purchase property through another company, this is fraught with potential problems:
- The company may be classed as a Close Investment Holding Company in which all company profits are taxed at the main rate of corporation tax (20%).
- Loss of interest relief on sums invested into the company.
- Deemed distributions of income which are taxable on the shareholders as if they were dividends.
Where a property is owned personally there is scope for reliefs via private letting relief and rent-a-room relief.
Please note the following points for you to consider relate to a second (investment) property, there is no capital gains implications on your main residence.
If you extract dividends from the company’s profits arising from rental income and you already have £44k income in tax year 2010/11, there is very little difference in your “take-home remuneration” – ie if you extract dividends from the company’s profits arising from rental income and you already have £44k income, there is very little difference compared with owning the property personally and having the rental income come directly to you.
Both the company and the individual are subject to capital gains tax if a capital gain is made. The individual would be subject to this when the property is sold to the company. If you paid £100,000 for a property and sold it for £200,000 to your company, then there would be a capital gain of £100,000. Subtracting the capital allowance of say £10k would mean that you would be taxed on £90k. This could be at 40% or even 50% if you are a higher rate tax payer and cannot claim entrepreneurs relief (if you can tax rate is 18%). Companies are not entitled to an annual exemption.
The company would be subject to this when the director closes his company down later on. This could be quite substantial if this is a few years down the line when the property has increased in value.
Loans and Mortgages
Obtaining a mortgage through your company can be quite difficult if your company is relatively new and they are usually a lot more expensive than a private mortgage. In order to transfer/buy the property through the company, all loans and mortgages would need to be in the company’s name. It would be advisable to get in touch with a mortgage advisor about this area.
Raising capital to buy property
Depending on who was buying the property you would usually raise the funds in the following ways:
a. If you were to buy the property personally, you would usually take dividends from your company. These are not taxed at all on an income of up to £44k gross (this tax year) and thereafter @ at least 22.5% on the gross dividend (25% on the net dividend you actually receive from your company).
b. If the company were to buy the property then capital gains tax is payable by company, when the property is sold, as above.
You would of course need to get in touch with a solicitor to transfer all of the deeds to the property to the company’s name which in itself can be expensive.
Residential property is VAT exempt.
As well as not charging VAT on the rent you would be unable to claim back VAT on any business expenses relating to the property side of the business and the company would be classed as partially exempt so this would mean the VAT you could claim on other company expenses may need to be apportioned for the element relating to taxable supplies i.e. office costs or accountancy fees however if you are on the flat rate scheme this shouldn’t be an issue.
If you have any questions, please contact us.