Building Property Portfolio - BTL / Company Structure

s0127786

Hi All,

I wanted to get advice on potentially using a private company to purchase initially my own house but subsequently future rental properties.

Some context:
I'm 32, additional rate taxpayer and own a modest flat (£120k / Scotland) outright. I would like to:

1. Build a new house to be my primary residence in the next year
2. Keep my current flat to rent out over a long term (20 years)

My thoughts:

1. Set up a private limited holding company and have that company, using a company mortgage (with personal guarantees) buy my flat for market rate hence releasing equity of the flat to me and allowing me to benefit from the Capital Gains exemption when selling. This also gives me the benefit of full business expense tax relief and I believe means the additional stamp duty for second, third homes etc does not apply?

2. Use that equity to build my new house and rent my current flat from my company for market rate.

3. Have the company effectively make a loss or close to a loss every year to minimise corporation tax while effectively using the rent to build deposits for future properties.

The tricky parts that I can see are:
1. Disposal of the capital assets within the company in 20 years time
2. Drawing income out of the company - I would plan to take minimum dividends / other cashflow when I get closer to 50 - I have no need for the income just now.

I do need to speak to an accountant but I'd be interested if I've missed anything obvious that would be a showstopper?

Thanks,


Michael

anselld

You would not lose the Capital Gains exemption when selling if you continued to own personally. Your entire period of residence remains exempt. In fact disposal to a Ltd Company would deny you reliefs you could otherwise claim, i.e. Letting Relief and the final 18 months ownership.

As far as I know the first purchase by a Limited Company *is* subject to the SDLT Surcharge. Chapter 5 ...
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/509184/GuidanceNote_Final.pdf

Limited Company Mortgage to release Equity will be more expensive than a normal personal BTL.

There are other expenses in running a limited Company.

There are very few circumstances where transferring a property you already own into a Limited Company is financially sensible. The set of circumstances where it makes some sense to own inside Ltd Company (by purchasing inside in the first place) is ...
(a) Where you are higher or additional rate tax payer from other income
(b) Where you wish to retain profit inside the Company for reinvestment rather than withdraw income.

So in your case, it might marginally make sense but you would have to weigh up the cost of SDLT, Legal fees, the loss of some CGT exemption and more expensive mortgage vs the tax saved on your retained profit.

Worth reading "Using a Property Company to Save Tax" by Carl Bayley, though it is not fully up-to-date with all the Osbourne BTL penalties.

s0127786

anselld wrote: »

You would not lose the Capital Gains exemption when selling if you continued to own personally. Your entire period of residence remains exempt. In fact disposal to a Ltd Company would deny you reliefs you could otherwise claim, i.e. Letting Relief and the final 18 months ownership.

To be clear, the intention is to end up with both the original flat and a new primary residence so I don't believe I would retain (long term) capital gains exemption?

ie: I'd be able to pro-rata the gain over the total ownership period based on the time I wasn't using the new house as my primary residence but I'd still be liable for CGT for the extra years I used it for rental income? (Appreciate, this would also be true with disposal within a private company).

anselld

s0127786 wrote: »

To be clear, the intention is to end up with both the original flat and a new primary residence so I don't believe I would retain (long term) capital gains exemption?

ie: I'd be able to pro-rata the gain over the total ownership period based on the time I wasn't using the new house as my primary residence but I'd still be liable for CGT for the extra years I used it for rental income? (Appreciate, this would also be true with disposal within a private company).

Yes, that is clear. But you will be losing CGT exemption my transferring to a Ltd Company.

Option 1:
You own the flat.
You dispose to Limited Company.
You continue living whilst House is built.
You move to new house.
Personal CGT exemption stops when you dispose to Limited.
Company then liable for gains (with indexation relief only) even though you are still living there waiting for new house to build.

Option 2:
You own the flat.
You continue own the flat while new house is built.
You move into the new house and rent out the flat personally.
You have PRR relief for your entire residence up to the point you move into the new house.
You have letting relief afterwards.
You have relief for the final 18 months of ownership.
You have your personal CGT allowance on disposal.

Depending on how long you have lived in the flat it will be a long time in letting before you become liable to CGT under personal ownership. Under Ltd Ownership there is only indexation allowance and the potential liability starts on day one of Company ownership.

s0127786

Ah thanks - I wasn't aware of the ability to keep the CG tax free even when no longer primary residence - that's interesting.

I suppose the second part then becomes around: 1) Income as additional rate taxpayer which can be offset by more pension contributions and 2) additional stamp duty when buying land for the new house (which might not be the end of the world since it's only paid on land)?