Renting out properties through a limited company in order to rent a single property

Comedy

I and my partner each own a house, we want to move in together and live in a single house but need more space than either of us have. In the short term we do not want to sell our houses to do this though. I understand that if we were to rent out our houses we would both be taxed on the rental income before being able to pool it and rent a place together.

The way I see it we would maybe both need to rent our places originally out to a limited company which we control at a nominal rate (and pay tax on that nominal amount), then the limited company would rent those places out to actual tenants, receive income and use that income to rent another property, with the limited company either being taxed on the difference in rental incomes as profits or with those profits being provided back to us as dividends and us being taxed on them.

I know the complexities of setting up a limited company so that isn't really the discussion here but I don't know how the government would look at the tax liability and us shifting it from being income tax to corporation tax rate / dividend tax rate.

At a corporate level this is perfectly normal behaviour but I don't know what HMRC think of regular landlords doing this.

silvercar

Sounds contrived and doomed to fail. How are you going to justify the limit3 company renting to you at a nominal rate?

anselld

HMRC will object to schemes set up with the sole intention of avoiding tax.

In any case I cannot see how your scheme would work. If the company rents a house for you to live in that would not be an allowable expense as it fails the "wholly and exclusively business test". You would also lose Private Residence Relief on your main residence as you would not own it.

... and don't forget 3% SDLT surcharge on the new property.

muhandis

The extended discussion here discusses the very same arrangement.
https://www.property118.com/btl-individually-owned-let-ltd-company/comment-page-2/#comments

The peppercorn (as opposed to commercial) rent charged by you to the Ltd co. is the crucial aspect.

Also see the Ramsay Principle - where a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole.

In your place I would pay for advice from an accountant as to whether this would pass muster or not from a tax pov.

joshp1993

I'd have to agree with the above. Admittedly I've never heard of this before but you are specifically engaging in it to avoid tax using highly artificial and contrived steps (Ramsey Doctrine), so HMRC could well take a dim view. They often play fast and loose with their own rules so I wouldn't ever be confident that they wouldn't come after you for this down the line (like the loan charge issues we're seeing now).

I would think that HMRC will look right through the transaction due to the nominal rent being paid which clearly isn't at fair value.

Adereterial

Tax evasion, nothing more. Don’t do this. HMRC will take an extremely dim view and you’ll at best end up with a hefty bill and fine, a criminal record at worst.

If you don’t want to pay the tax, sell one or both of the properties.

Comedy

Cool thanks for the opinion everyone, especially muhandis for the link. I will definitely get professional advice but it does look like a no go.

Just curious though, for those who have previously answered. If there were no agreement to rent the properties to the limited company, we just owned them and the limited company still rented them out and then rented a single property.. where would this fall down? I have previously rented a property through an agent and didn't provide the agent with any proof of ownership.

Comedy

One more thing to all.. I am absolutely not interested in getting involved in tax evasion or anything that sails close to the wind, it isn't the kind of worry I need in life. I am just looking at ways to see if the situation can work.

anselld

Comedy wrote: »

.. where would this fall down?

As said in post 3 ... renting a property for you to live in is not an allowable business expense as far as the Ltd Co is concerned.

... and if you rent it privately you need to extract the rental incomes first which incurs div tax on top of CT.