Switching BTL to SPV

pavsid

Hi all, looking for some advice and suggestions on an idea I've had..

I have a BTL in my personal name, currently in a 5yr fixed mortgage with 3.5yrs left at 2.39%.

I am a director and get paid in salary and dividends, and so do a tax return each year with the rental income included. I get about £8k a year in rent, virtually all of which goes towards the BTL mortgage including overpayments.

I'm not a higher rate tax payer and prefer to keep it that way, but am at the threshold.

My problem is that I'm "missing out" on £8k a year which would go a long way.

So, I've been thinking about moving my BTL to an SPV which would effectively "free up" £8k a year for me to take personally.

I've done some digging into the costs of going through a SPV and on the most part it makes sense. I can get 2.99% rate with 2% product fee. However, the early repayment charge would be about £4k and as I'll be selling the property to the SPV then SDLT would be payable of about £5.5k.

Ultimately, there would be about £12k in fees to move it to an SPV, which I guess I can add to the new mortgage, but over time that means paying a lot more in interest and adds 3 years to the mortgage term.

Financially it doesn't make much sense, but from a personal perspective, being £8k a year "better off" is extremely tempting.

What are your thoughts?

BoGoF

What makes you think you would be £8k a year better off? There will still be a mortgage (or at the very least interest to pay). There will still be some form of tax on what you take out the company. If the property has increased in value then there is potential for capital gains tax on the disposal.

Add on the added compliance costs of a Ltd company then, for such a low value income, there is very little sense imo.

[Deleted User]

The company will have to pay the higher rate of SDLT when purchasing the property from you.

pavsid

Hi BoGoF, thanks for your reply.

I put "better off" in quotes because moving to SPV would free up £8k on my tax return which I could draw as a dividend from my company, making me personally better off.

I'm aware the SPV will still have a mortgage to pay, and tax on profit, but all that will be covered by the rent.

What I hadn't considered is any capital gains tax due upon selling the property to the SPV. That's another £6k or so!

It's all sounding like an awful waste of money..!!

Thanks.

silvercar

I put "better off" in quotes because moving to SPV would free up £8k on my tax return which I could draw as a dividend from my company, making me personally better off.

The dividend allowance is only £2k, so you would be paying tax on the remainder of the dividend. 18% or 28% depending whether you are a hugher rate tax payer.

pavsid

silvercar wrote: »

The dividend allowance is only £2k, so you would be paying tax on the remainder of the dividend. 18% or 28% depending whether you are a hugher rate tax payer.

Hi, dividend tax is 7.5% which I already pay as I get paid in dividends by my company. But that's not the issue.

The issue is whether all these fees and taxes involved in transferring ownership of the BTL to the SPV are worth it, in order to free up £8k a year on my tax return (which I could then draw as extra income/dividends from my company).

BoGoF

Still not seeing where the 8k you think is available to draw on? That's the gross rent? What are you looking at net profit after expenses?

Seems a bonkers idea to me for one small rental income property. It would take years to break even on the transfer costs. If you are going to do it at least wait till you're out your fixed rate.

pavsid

BoGoF wrote: »

Still not seeing where the 8k you think is available to draw on? That's the gross rent? What are you looking at net profit after expenses?

Seems a bonkers idea to me for one small rental income property. It would take years to break even on the transfer costs. If you are going to do it at least wait till you're out your fixed rate.

Haha - yes, I see why it might seem like a completely "bonkers" idea. The extra £8k would come from my company in dividends, nothing to do with the BTL or SPV, and just so you don't think I'm completely mad, let me explain the method in the madness...

As an example, let's say my current position is this:-
- £8k per year in rental income
- £42k per year in salary and dividends
- Total gross income = £50k (lower tax bracket)
- Less £8k per year which goes to paying BTL mortgage off
- Less £2.5k in income/dividend tax
- Total net income = £39.5k

Moving the BTL to an SPV would mean I could draw an extra £8k from my company while still remaining within the lower tax bracket, and result in the following:-
- £42k per year in salary and dividends
- Add £8k extra dividends
- Total gross income = £50k
- Less £3k (approx) in income/dividend tax
- Total net income = £47k

I would be "better off" by £7.5k a year. Sure, my company would be paying me an extra £8k in dividends, but at least I wouldn't be paying 32.5% tax on it.

The objective is to improve my personal net income position, while remaining in the lower tax bracket. It doesn't make sense to just draw more dividends and pay 32.5% tax on it, as it would cost an extra £2.5k in tax per £10k drawn, which over the years would add up to far more than the costs involved in moving the BTL to an SPV.

However, with the stamp duty, fees, and capital gains tax (which I had overlooked), the costs involved in moving to a SPV do seem to be spiralling, but even still, if these can be added to the SPV mortgage (and the rent still covers the repayments, tax & costs) then my personal income position would still be better.

Maybe this is better suited to a money management forum..?

Cscott139

Speak to a property tax specialist. I have been made aware of the possibility of not having to pay the higher rate stamp duty when doing this.

BoGoF

pavsid wrote: »

Haha - yes, I see why it might seem like a completely "bonkers" idea. The extra £8k would come from my company in dividends, nothing to do with the BTL or SPV, and just so you don't think I'm completely mad, let me explain the method in the madness...

As an example, let's say my current position is this:-
- £8k per year in rental income
- £42k per year in salary and dividends
- Total gross income = £50k (lower tax bracket)
- Less £8k per year which goes to paying BTL mortgage off
- Less £2.5k in income/dividend tax
- Total net income = £39.5k

Moving the BTL to an SPV would mean I could draw an extra £8k from my company while still remaining within the lower tax bracket, and result in the following:-
- £42k per year in salary and dividends
- Add £8k extra dividends
- Total gross income = £50k
- Less £3k (approx) in income/dividend tax
- Total net income = £47k

I would be "better off" by £7.5k a year. Sure, my company would be paying me an extra £8k in dividends, but at least I wouldn't be paying 32.5% tax on it.

The objective is to improve my personal net income position, while remaining in the lower tax bracket. It doesn't make sense to just draw more dividends and pay 32.5% tax on it, as it would cost an extra £2.5k in tax per £10k drawn, which over the years would add up to far more than the costs involved in moving the BTL to an SPV.

However, with the stamp duty, fees, and capital gains tax (which I had overlooked), the costs involved in moving to a SPV do seem to be spiralling, but even still, if these can be added to the SPV mortgage (and the rent still covers the repayments, tax & costs) then my personal income position would still be better.

Maybe this is better suited to a money management forum..?

In Example 2 you are forgetting the Corporation Tax on the rental income. And you can't take 8k extra dividends if the net profit is only 5k say ( slightly more complicated than that I know).

You really need to run calculations based on the taxable rental profit figure.

BoGoF

Cscott139 wrote: »

Speak to a property tax specialist. I have been made aware of the possibility of not having to pay the higher rate stamp duty when doing this.

Most likely a scam or avoidance scheme which may result in an HMRC enquiry.