already own a property but want to let it

andyinlondon

Hi all i already own a property in Scotland but i now want to let it.
My question is should i set up a company to do this through, i am looking at the tax benefits or not to selling this property to my own company and then having the company repay the debt as opposed to taking an income or drawings until the debt is repaid and then taking any profits if there are any as dividends in 10 years time.
Can anyone advise me?

Many thanks

Andy

Pixie5740

andyinlondon wrote: »

Hi all i already own a property in Scotland but i now want to let it.
My question is should i set up a company to do this through, i am looking at the tax benefits or not to selling this property to my own company and then having the company repay the debt as opposed to taking an income or drawings until the debt is repaid and then taking any profits if there are any as dividends in 10 years time.
Can anyone advise me?

Many thanks

Andy

Which particular tax benefits are you referring to?

The CGT liability you will trigger when you transfer ownership to the company assuming the property is not your main residence or the Private Residence Relief and Letting Relief you will lose by transferring ownership of it is/has been your main residence?

The Additional Dewlling Supplement LBTT the company will pay for purchasing the property from you perhaps?

I think though you are referring to income tax which is just one of the taxes paid by landlords and only focusing on it will not tell you the whole story.

andyinlondon

Hi Pixie.

Thats the problem i don't know what is the best thing to do with it.

let it my self or create a ltd company and do it that way or just sell it and have done with it.

00ec25

so a company which has the cash to buy the property from you? Or do you think the company can raise the finance itself through its own borrowings?

CGT, higher rate LBTT, offset against interest still being allowable in full (for now?) against corporation tax for the company?

what advice have you taken so far for your pipe dream?

Pixie5740

andyinlondon wrote: »

Hi Pixie.

Thats the problem i don't know what is the best thing to do with it.

let it my self or create a ltd company and do it that way or just sell it and have done with it.

What rental yield would you expect to make letting the property? How much income tax would you have to pay? How does that compare with the income and corporation tax paid by the limited company + CGT + ADS LLBT + costs of setting up and administrating the limited company?

andyinlondon

00ec25 thank you for your kind and helpful advise,
so far i have not taken any professional advise yet as i am in the early stages of this decision and i am looking for some helpful pointers to steer me in the right direction so i can ask the right questions when i do get professional advise and do not waste time or go down the wrong path.
The company i have in mind would not have the cash to buy outright or need to raise finances as the idea is to loan the company the house as a capital investment and the company would then pay the loan investment back as it gathered revenue.
This way until the capital loan is repaid i should have no income tax liability except for the interest part of the repayments, apparently i have to charge interest on the capital loan.
I am asking if this is a sensible way forward or would i be better off letting it as a private landlord or just selling it.

andyinlondon

Pixie the loan should be repaid at about 7% but with minimal income tax as it is a loan repayment until it is repaid, then it would become income with a tax liability but that is 10 years or so away.

Pixie5740

andyinlondon wrote: »

Pixie the loan should be repaid at about 7% but with minimal income tax as it is a loan repayment until it is repaid, then it would become income with a tax liability but that is 10 years or so away.

Ok so you'd be paying income tax on the loan interest and the limited company would be paying income corporation tax on the rental income. Does that work out less expensive than you paying income tax on the rental income? You still haven't said what girls yield you expect the property to achieve as a rental.

I take it the property is unencumbered ie there's no mortgage outstanding presently?

andyinlondon

Pixie the local council are offering a 10 year rental / lease agreement with a monthly payment of £720 and they grantee the rent even if empty, they also will return it in the same condition as they receive it, ie any damage made good ect.
the house is unencumbered.

00ec25

andyinlondon wrote: »

00ec25 thank you for your kind and helpful advise,
so far i have not taken any professional advise yet as i am in the early stages of this decision and i am looking for some helpful pointers to steer me in the right direction so i can ask the right questions when i do get professional advise and do not waste time or go down the wrong path.
The company i have in mind would not have the cash to buy outright or need to raise finances as the idea is to loan the company the house as a capital investment and the company would then pay the loan investment back as it gathered revenue.
This way until the capital loan is repaid i should have no income tax liability except for the interest part of the repayments, apparently i have to charge interest on the capital loan.
I am asking if this is a sensible way forward or would i be better off letting it as a private landlord or just selling it.

so you as shareholder and thus owner of the company will "give" a (mortgage free) property to your company in return for a charge over the property and a loan agreement with the company stipulating interest rate terms and repayment period ?

you have the cash to pay the CGT payable by you personally on such gift (market value of property 200k, say your purchase proice was 100k, gain 100k - allowance = 88,300 @ 28% = £24,724 tax to pay ?

the company has the cash to pay the SDLT due on the full market value of the property "gift" since it comes from a "connected person"? 200k @ higher rate SDLT = £7,500 payable

the company will pay corporation tax (currently 19% ) on the profits it makes. Said profits being after deducting the interest payable on the loan from you. You take the profits out of the company by way of either salary and/or dividends.

the company is liable for repair costs since they are the property owner. The company needs an accountant to file accounts done in accordance with statutory rules and pays the usual (small) admin costs for its existence, eg annual companies house fees.
The company retains enough cash to meet such eventualities?

you personally pay tax on any salary you draw and dividend tax on the dividends you take. Presumably you have a job elsewhere so taking a salary would be tax inefficient. Assume all as dividends

when the property is sold the company will pay CGT on the entire gain, no relief given

back of fag packet comparison:

Your ownership: rental income £720 x 12 = 8640 pa, no interest charge (mortgage free) net taxable profit £8640. Tax due (assume basic rate taxpayer) £1728. Post tax earnings £6912

Company ownership: Company pays 2% interest on value of property loan - Scottish property value guess 200k? 2% interest = 4,000. No director salary, so company taxable profit 8640-4000 = 4640. 19% Corp tax thereon £881. Post tax profit available for dividends 3759. Dividend taken 3759.
Your personal income:
a) dividend 3759 taxable at 7.5% = 282 tax
b) interest received 4,000 taxable at 20% = 800
post tax income for you personally 3759 + 4,000 - 282 - 800 = 6,677

crunch some more realistic numbers and see what you get....

G_M

andyinlondon wrote: »

Pixie the local council are offering a 10 year rental / lease agreement with a monthly payment of £720 and they grantee the rent even if empty, they also will return it in the same condition as they receive it, ie any damage made good ect.
the house is unencumbered.

:eek::eek::eek::eek::eek::eek::eek::eek:

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