Legal/Illegal? Wise/Foolish? Company Tax

D_Dickenson

Hi there,

I wonder if an Company Tax experts could offer their opinion on my situation.

I am self employed (have my own Ltd Company that produces computer software - I am the only employee). Recently sales have been good so the company will register an annual profit of about £200K in November (This is the first year I have made a profit in the 3 years since starting the company - it was a one off situation so I don't expect large profits again in the near future).

So in order to get at the money I believe I need to declare a dividend in November and pay Corporation Tax/Capital Gains Tax on these profits. A friend suggested I do this instead:

My company could buy my house (current value approx £300K) from me and then rent it out to either my self or to tennents in order to pay off any mortgage the comapny has to take to buy it.

This way I would get the whole value of the house in cash right now (and so I could buy a different house elsewhere). My company wouldn't make any profit and so would not have to pay any Corportation Tax. In 20 years when the company has paid off the mortgage then I would end up with 2 houses - one belonging to me and one to my company.
During the next 20 years I could declare dividends below the personal tax threshold and so get at the money gradually without having to pay Corportation Tax/Capital Gains Tax.

It seams to win both ways to me but I'm no expert. Can anyone tell me if this is legel and wise or dodgy and foolish?

Many thanks for any advice

Matt

Robert_Sterling

Company buys your house.
Company pays stamp duty £9,000.

WHA

The company buying a house does not reduce its profits - a house purchase would be an asset addition, not an expense, so no deduction against profits.

Also, the company would not accrue the same degree of capital gains tax reliefs, such as principal private residence relief, lettings relief or taper relief, so the company would probably pay a lot more capital gains tax when the house is finally sold than you would have done personally if you had kept it yourself.

Altogether a poor idea that won't achieve what you expect.

D_Dickenson

Well I guess that covers it pretty comprehensively - thanks to both of you for steering me clear of a big mistake!

Stonk

If you don't need the money right now, you could draw it to yourself gradually over several years, keeping yourself just fractionally under the Higher Rate personal tax threshold each year. This is only beneficial if you expect to be less than a Higher Rate taxpayer in the future.

You'll pay Corporation Tax on the profit for the year ending November, and you have 9 months in which to pay it. There's nothing you can do to delay that side of things. When or if you declare the dividend is irrelevant - it's the company's profits (revenues minus expenses) that matter.

Then you can keep the remainder of the money in the company as retained profit, and take moderate dividends over a period of several years.

matthewuk

As this is the first year you've made profits, I would have thought that you could get relief against those profits using past losses.

(I have to admit to be learning about this at the moment and someone who's actually dealt with this is in a far better position than me to advise).

PosterBoy77

I think there may be some merit in this idea, even if some people posting think it is a bad idea. Firstly, the value of the house is deemed to be about 300k, is this a fair valuation or an optimistic one? If a fair valuation is 250k, then the company could buy the house and pay only £2500 in stamp duty. The next thing to do would be to dome some things to improve the property and then probably try and sell it on. If you can show that the house was bought for development purposes, it can be argued that it is an area of trade that the company is wishing to participate in. Profits could then be used to buy the house to sell on. The company would then have to sell the house as soon as the work was done to show that it is simply in the business of developing. If you can prove that the property is being actively marketed and you could not find a buyer and found tenants for a while, it could still be argued that it is a business. If this path is followed I suggest that you hold a meeting in your company deciding on the change of direction and record a different class of business for your limited company.

If the company sells the house, there would hopefully be a profit, but probably not that much, and this could be extracted in the form of a dividend.

I'm not an expert in the area, but do take an interest in tax rules, so I shall let any other accountant here tell me what flaws there would be in this process.

Mikael

this_here_giraffe_laughed

D_Dickenson would also have an annual benefit chargeable to income tax if the company purchased the house. This benefit has two components:
(i) Capital BIK based on the gross rateable value of the property
(ii) Expensive living accomodation charge based on (MV - 75k) x 5%.

The rateable value could be, say, 15k? (ii) would be 11k on 300k MV. So a 26k benefit would be 10k tax at 40%.

I think there could also be some CGT issues as the transaction is between connected parties. I should imagine the transfer would be treated as being made at TWDV (original cost + indexation allowance) rather than the market value. This would increase the gain made by the company as it would be based on the original cost.

I can't see how the house can be bought for development purposes if it is to be lived in by the director-owner. Plus the profit on disposal would not attract indexation if taxed as trade rather than capital.

It seems simpler to draw dividends of about 38k or so a year rather than bear the taxable benefit, CGT and stamp duty implications on the transaction. Dividends up to the basic rate are tax-free on the individual provided 19% corporation tax has been paid on the profits. On the higher rate there is an effective 25% charge.

PosterBoy77

The OP did say that he would be likely to move out into another house, so then the house itself could be "developed" I do agree that if he carried on living in it, it would cause complications. However there would only be a benefit in kind charge if he were to rent it back from the company below market value. However, renting it back etc would in my view just be muddying the waters and asking for trouble.

Aark

There is no way to avoid paying the Corporation Tax on the Company's profits unless the Company makes or has made losses to set against the profit.

Buying a house will not reduce profits.

Personally, the transaction leaves you with cash but no house. No Capital Gains Tax is due as long as the house is your principal private residence.

If you then buy another house, then neither you nor the company has cash but you both have a house.

I can't see how this plan extracts anything of value from the company. Unless you want your Company to hold a house, there doesn't seem to be a point to it. If you want the value of the profits out of the company, you now have to sell the Company-owned house and pay Corporation Tax on any profits/chargeable gains during its ownership.

You would still have to pay Income Tax on any dividends received in the higher rate band to get the proceeds out of the Company.

PosterBoy77

I can see quite big point. The OP may want to be able to buy a hosue with the cash anyway! If the company bought the house for £250k and he got 250k to buy another house elsewhere, the company would be able to improve the house and perhaps sell it on for £300k or so, after having put lets say 15k into it in the form of improvements. The upshot would be that it would then make a profit of £35k which would then be taxed at Corporation Tax rates. The remaining profit could then be paid out in the form of a dividend, perhaps split over two years so the OP would not have any further tax to pay and potentially avoid any higher rate tax.