Buy to let – company or private
Discussion
Slightly different angle to the other buy-to-let thread going at the moment.
I currently let out three properties and am thinking about expanding my portfolio. I am wondering whether now is the time to start looking at this as a company enterprise rather than a private sideline. The way I see it I have two options:
a) Sell the existing properties to a newly set up UK limited company company (owned by me).
b) As above but keep the existing properties private and purchase any new property through the new company.
So… if option a):
1. Commercial mortgage rates, what can I expect to pay?
2. Getting commercial mortgages, is this easier than getting private mortgages (bearing in mind this will be a start up company)?
3. I assume any retained profit will attract corporation tax at 10% (for the level of profit I currently make) rather than 40% personal tax as it does now?
4. CGT. What’s the corporate rate for this and does it work the same as for private individuals i.e. you pay when the gain is realised? Or do capital gains go on the P&L so they are taxed as normal profit?
5. VAT registration and maintenance. I assume if the gross rent of all properties is over the threshold I can be VAT registered and claim this back off maintenance work carried out (plus also any agency fees)?
6. I want to retain as much revenue in the company for future investment back into more property. Would I have to pay myself a minimum wage as a director?
And if option b):
All of the above plus: What’s the best way to transfer the existing properties to the new company? I assume I have to sell at market rate so would I have to pay CGT on the sales as a private individual? Also my start up capital for the company is the equity in the privately owned properties so a bit of a chicken and egg situation here. I need to sell the properties to release the equity but I need the cash in the company before it can by the properties. How would I get around this?
Or should I just keep it all private? Any help or advice much appreciated.
Oh and I just thought - what about going offshore since I am a non-UK tax resident.
I currently let out three properties and am thinking about expanding my portfolio. I am wondering whether now is the time to start looking at this as a company enterprise rather than a private sideline. The way I see it I have two options:
a) Sell the existing properties to a newly set up UK limited company company (owned by me).
b) As above but keep the existing properties private and purchase any new property through the new company.
So… if option a):
1. Commercial mortgage rates, what can I expect to pay?
2. Getting commercial mortgages, is this easier than getting private mortgages (bearing in mind this will be a start up company)?
3. I assume any retained profit will attract corporation tax at 10% (for the level of profit I currently make) rather than 40% personal tax as it does now?
4. CGT. What’s the corporate rate for this and does it work the same as for private individuals i.e. you pay when the gain is realised? Or do capital gains go on the P&L so they are taxed as normal profit?
5. VAT registration and maintenance. I assume if the gross rent of all properties is over the threshold I can be VAT registered and claim this back off maintenance work carried out (plus also any agency fees)?
6. I want to retain as much revenue in the company for future investment back into more property. Would I have to pay myself a minimum wage as a director?
And if option b):
All of the above plus: What’s the best way to transfer the existing properties to the new company? I assume I have to sell at market rate so would I have to pay CGT on the sales as a private individual? Also my start up capital for the company is the equity in the privately owned properties so a bit of a chicken and egg situation here. I need to sell the properties to release the equity but I need the cash in the company before it can by the properties. How would I get around this?
Or should I just keep it all private? Any help or advice much appreciated.
Oh and I just thought - what about going offshore since I am a non-UK tax resident.
I can't help much, other than to suggest that this is a fairly complex area and that you should see an accountant so you can judge the fores and against of each way of going about this.
A couple of points: a company you set up is going to be more difficult to undo if you should wish to get out at a later date.
I would advise against getting involved with VAT if at all possible. Obviously, if your gross income is over the threshold you can't avoid it, but it's a lot more paperwork and the possibility of thorough inspections now and then.
A couple of points: a company you set up is going to be more difficult to undo if you should wish to get out at a later date.
I would advise against getting involved with VAT if at all possible. Obviously, if your gross income is over the threshold you can't avoid it, but it's a lot more paperwork and the possibility of thorough inspections now and then.
A very cheeky question as you have put an awful lot of technical points into your post worth at least an hour of a professional tax advisor's or accountant's time.
However, seeing the incorrect comment below about VAT I thought I'd straighten this particular piece of information out for you. The turnover threshold for VAT (currently £56,000) is completely irrelevant. This is a "Trading Income" threshold. Rent is not considered to be trading income. It is, in fact, classified as "Investment Income" and is therefore exempt from VAT. However, the VAT legislation allows a landlord to exercise an option to have a particular property "VATted" if he so wishes. This will allow him to recover VAT on the costs of running and maintaining the property but he must, of course, charge VAT on the Rental Income. Even worse, he has to charge VAT on the sale price of the property when it is eventually sold. This can be a particular problem if your potential buyer is not VAT registered.
>> Edited by eric mc on Tuesday 10th June 16:40
However, seeing the incorrect comment below about VAT I thought I'd straighten this particular piece of information out for you. The turnover threshold for VAT (currently £56,000) is completely irrelevant. This is a "Trading Income" threshold. Rent is not considered to be trading income. It is, in fact, classified as "Investment Income" and is therefore exempt from VAT. However, the VAT legislation allows a landlord to exercise an option to have a particular property "VATted" if he so wishes. This will allow him to recover VAT on the costs of running and maintaining the property but he must, of course, charge VAT on the Rental Income. Even worse, he has to charge VAT on the sale price of the property when it is eventually sold. This can be a particular problem if your potential buyer is not VAT registered.
>> Edited by eric mc on Tuesday 10th June 16:40
eric mc said: A very cheeky question as you have put an awful lot of technical points into your post worth at least an hour of a professional tax advisor's or accountant's time.
Eric, a bit cheeky I agree
. I fully intend to go to a professional before committing to anything but just thought I'd sound out the idea on here first. Thanks for the tip on VAT. That sounds like a no-no for a start.As a chartered tax advisor and a qualified accountant (what an exciting life I lead) I can let you know of one massive disadvantages of having properties in a limited company. When you come to sell the property the gain (if any) will be taxed in the company (Corporation Tax) but then the net proceeds will still need to be extracted from the company which will mean more tax to be borne.
I must add this is not a conclusive answer as it has been a long day and I can't think of all aspects but that is my immediate thought.
Also I take no liability for any loss etc suffered as a result of this, please seek full professional advice.
>> Edited by wattsm666 on Thursday 12th June 19:46
I must add this is not a conclusive answer as it has been a long day and I can't think of all aspects but that is my immediate thought.
Also I take no liability for any loss etc suffered as a result of this, please seek full professional advice.
>> Edited by wattsm666 on Thursday 12th June 19:46
Your accountant is correct. A company letting property is considered to be an investment company, not a trading cpmpany. Consequently, there are specific accounting rules and tax regulations that the investment company has to adhere to - such as revaluing its asset portfolio (ie letting properties)EVERY year and adjusting the balance sheet accordingly EVERY year.
Whilst receiving rent, the company pays Corporation Tax on the profits from its rental activities. If it loses money, it can carry the losses forward for offset against future profits. CT rates are very low at the moment (the first £10,000 of taxable profit is calculated at Zero Rate of Tax, for example). The problem arises when the shareholders/directors try to extract the money from the company for themselves personally. If done through a salary, normal PAYE and NIC will be due. If done through a dividend, tax only will be due.
Finally, if and when the company decides to sell the property, Capital Gains Tax will become due on the surplus on disposal. CGT for companies is charged at the Corporation Tax rates (which are generally lower than Income Tax rates) but companies do not get the annual CGT allowance (currently £7,900 available to individuals), Additionally, the problem still remains as to how to extract the proceeds from the company and minimising the personal tax implications.
Not straightforward at all, is it?
Whilst receiving rent, the company pays Corporation Tax on the profits from its rental activities. If it loses money, it can carry the losses forward for offset against future profits. CT rates are very low at the moment (the first £10,000 of taxable profit is calculated at Zero Rate of Tax, for example). The problem arises when the shareholders/directors try to extract the money from the company for themselves personally. If done through a salary, normal PAYE and NIC will be due. If done through a dividend, tax only will be due.
Finally, if and when the company decides to sell the property, Capital Gains Tax will become due on the surplus on disposal. CGT for companies is charged at the Corporation Tax rates (which are generally lower than Income Tax rates) but companies do not get the annual CGT allowance (currently £7,900 available to individuals), Additionally, the problem still remains as to how to extract the proceeds from the company and minimising the personal tax implications.
Not straightforward at all, is it?
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