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LLC before Buy To Let

edited 17 May 2019 at 11:13PM in House Buying, Renting & Selling
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harshitguptaiitrharshitguptaiitr Forumite
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edited 17 May 2019 at 11:13PM in House Buying, Renting & Selling
Hello
Please delete if not appropriate to this forum

In a household, where one person is employed (40% taxpayer) and spouse is not employed. They want to invest in a single buy to let property.

Can they form a Limited Liability Company and buy a property for rent under BTL mortgage
Will lender see saving & income of this one person and provide BTL mortgage to the LLC?

How will the employment status in the eyes of taxman change for these two individuals - the person who is not working will become employee of LLC and the person who is already employed will now have 2 jobs?

Can the rental income from this one property be given completely to the individual who is otherwise not working - this is so that they can pay enough NI to get qualifying years for state pension? And also reduce income tax liability for the other individual who is already paying 40% tax?

Will they be paying tax twice, as in tax paid by LLC and then tax paid on income taken by these individuals from LLC?

Again, sorry if this is not the right place.

Replies

  • da_ruleda_rule Forumite
    3.6K posts
    Sixth Anniversary 1,000 Posts
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    A LLC is a separate entity from the owners of the LLC (the shareholders, assuming it will be limited by shares rather than guarantee).

    The profits from the LLC are then subject to corporation tax. Any post-tax profits can then be distributed to the shareholders as dividends. Dividends are taxed differently to income.

    You can also, by using the share allocation, alter how much each share holder receives in dividends (eg you have 1 share and the other person has 99, they will therefore receive 99% of the dividends and you will receive 1%) if there is a tax benefit for you in doing so. Obviously unequal share ownership (especially if one party has more than 66% of the shares) can cause real problems if the relationship between the parties ever breaks down.

    At least one person will need to be a director of the LLC. You can then either draw a salary as a director (which will be subject to income tax, but reduce the LLC’s corporation tax bill) or not. Most directors of small LLC’s who are also the only shareholders tend to opt just to receive dividends as this is often more tax effective.

    Obviously, LLC’s can own property in their own right. However you have to look at a new LLC almost like a new born child. It will have no credit history nor any assets. So that then raises the question of how you would inject capital into the LLC for the deposit (and all the fees etc) for the property. You’d either have to inject the capital by ‘purchasing’ the shares for the deposit amount or you’d have to give the company a director or shareholder loan. In this case the company would essentially be starting life with debt around its neck. However, LLC’s can pay back loans to directors/shareholders and pay a market rate of interest with no tax implications (in most cases) for the director/shareholder. Often, this is used in the first few years of the LLC’s life, in that rather than declaring a dividend, any profit is used to pay off the loans (plus interest).

    A lender would probably then look at the directors and shareholders and see what assets they have and ask them to enter into guarantor agreements, and also ask for their loan to take priority over any director/shareholder loan.

    You also have to think that you would have to have accounts made up, complete yearly returns etc.

    If the main objective is simple tax planning, a simpler solution may be to just purchase the house jointly, with you owning a lesser share than your spouse. You can gift her the deposit if needed as gifts between spouses are exempt from CGT and IHT. You would then pay income tax based on the percentage ownership. HMRC Form 17 deals specifically with this and let’s you notify HMRC that the beneficial interest in the property (and therefore the liability to pay tax on the income) is not the assumed 50/50.
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