Renting furniture to yourself

westernpromise

My other half will be inheriting about £500k during this year from the probate sale of a house. She wants to put a chunk of this into an investment property.

From the same source she’ll also be inheriting things like armchairs, sofas and beds, from the guest rooms of the house in question. As it happens, these are all new or nearly so. They are already in the probate figure, valued in among all the house contents.

Given that the wear and tear allowance on furnished property has been withdrawn, is there any reason she cannot do the following?

1/ establish Company H and capitalize it with enough to buy the house
2/ establish Company F and capitalize it with enough to buy the above furnishings off the estate
3/ have H rent furniture for the house off F
4/ Company H deducts the cost of renting furniture from the house-letting income for tax purposes
5/ Company F deducts depreciation of the furniture from the furniture-letting income for tax purposes
6/ Within what the probate value allows, the sale price of the furniture is calculated to ensure little or no tax for Company F.

This would effectively re-create the wear and tear allowance, but would not simply turn the tax thus saved by H into an equivalent tax liability on F, because the depreciation means F woudl pay less and possibly no tax.

Does anyone do this? Does it work?

HappyMJ

That's a very complex way to save a few pounds of tax. What's wrong with just replacing items as and when required and claiming the full cost as an expense in the year the expense was incurred.

Cheeky_Monkey

Oh the poor love, how awful for her. As if it's not bad enough being 'given' £500k, she has to spend all that time and effort trying to work out a complex tax avoidance scheme. I feel her pain.

Unfortunately, I have no experience of such sums of money so am unable to offer any advice on how she could achieve her aim - sorry!

westernpromise

HappyMJ wrote: »

That's a very complex way to save a few pounds of tax. What's wrong with just replacing items as and when required and claiming the full cost as an expense in the year the expense was incurred.

That would means all the furniture goes in at the start of year 1 and all the tax offset goes against the first year's rent, in which there's probably little to no tax liability anyway. So it's largely wasted and you then get no tax deduction in any year until it's replaced.

Doing the above spreads the tax offset across multiple years, and also scales to more than one property in due course.

camptownraces

westernpromise wrote: »

That would means all the furniture goes in at the start of year 1 and all the tax offset goes against the first year's rent, in which there's probably little to no tax liability anyway. So it's largely wasted and you then get no tax deduction in any year until it's replaced.

Doing the above spreads the tax offset across multiple years, and also scales to more than one property in due course.

You are making things too complicated, and you've got it wrong.

The losses on the letting can be carried forward to the next tax year, and to following years after that if necessary. So it's not "largely wasted".

booksurr

"depreciation" is not an allowed expense when calculating the (corporation) taxable profit for a Ltd company. Instead, companies claim "capital allowances", these are rigidly defined, the most common type being "plant and machinery"

clearly you have never read Section 35 of the Capital Allowances Act 2001. It expressly prevents landlords from claiming capital allowances for any P&M that is provided for use in a ‘dwelling-house’.

buying the property using company H funded by a directors loan is a not unreasonable option and is the best (?) way to fund a company rather than having to get commercial loans (expensive!) for a company with no credit history

Company F is nonsense.

You need to do a lot more research on the costs of operating companies and the tax efficiency of drawing income from a company v directly receiving net profit from a residential letting.

Rain_Shadow

Cheeky_Monkey wrote: »

Oh the poor love, how awful for her. As if it's not bad enough being 'given' £500k, she has to spend all that time and effort trying to work out a complex tax avoidance scheme. I feel her pain.

Unfortunately, I have no experience of such sums of money so am unable to offer any advice on how she could achieve her aim - sorry!

Nothing like the taste of sour grapes is there?

westernpromise

booksurr wrote: »

"depreciation" is not an allowed expense when calculating the (corporation) taxable profit for a Ltd company. Instead, companies claim "capital allowances", the most common type being on "plant and machinery"

clearly you have never read Section 35 of the Capital Allowances Act 2001. It expressly prevents landlords from claiming capital allowances for any P&M that is provided for use in a ‘dwelling-house’.

buying the property using company H funded by a directors loan is a not unreasonable option. Company F is nonsense.

You need to do a lot more research on the costs of operating companies and the tax efficiency of drawing income from a company v directly receiving net profit from a residential letting.

Thanks, I didn't know any of that. I've only ever let out property I already owned and haven't let out furnished property in 20 years.

AnnieO1234

Exactly what BookSurr said. There's a lot more to it than what you are suggesting, and you do need to understand capital allowances (and exclusions thereto) a lot better than you currently do. Can I suggest that you/friend speak to a bona fide financial advisor? I personally use an insolvency firm who know the ins and outs of things and/or run it by my solicitor as required. xxx

AnotherJoe

This scheme sounds like a wholly artificial contrivance and thus I suspect would be counted as tax evasion should it come to light.

ThePants999

Rain_Shadow wrote: »

Nothing like the taste of sour grapes is there?

Mmmm. I've long found it an odd quirk of this forum that money saving is considered a great thing if you don't have much of it, but poor form if you have plenty.