Buying property through company profits and paying no tax

Jeremy535897

If your aim is to build a property portfolio, your approach carries the risk that if you have only one (highly geared) property, and you get the tenant from hell, you could be in difficulties.

Putting the property in a company has the benefit that the company can claim all of the mortgage interest as a deduction, instead of being limited to a basic rate tax credit as an individual (so that the tax bill can actually exceed the net rent if you are a higher rate taxpayer). This point, amongst others, is discussed here:
https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

unholyangel

Jeremy535897 said:

If your aim is to build a property portfolio, your approach carries the risk that if you have only one (highly geared) property, and you get the tenant from hell, you could be in difficulties.

Putting the property in a company has the benefit that the company can claim all of the mortgage interest as a deduction, instead of being limited to a basic rate tax credit as an individual (so that the tax bill can actually exceed the net rent if you are a higher rate taxpayer). This point, amongst others, is discussed here:
https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

From the sounds of things, it could potentially fail to meet the badges of trade. I know not definitive on its own but OP said rent will barely cover mortgage payment. 

If its not going to cover the mortgage, it's not going to cover the repair or maintenance expenses. Or allow the company to build up any profits to invest in other properties. It sounds like it's going to be loss making. 

Also opens the question on whether market rate is being charged and if not, why not. If yes then it sounds like a bad investment. 

unholyangel

OP you urgently need proper advice if you're serious about this. 

You don't seem to have properly considered ir35/be assessing it on the right basis.  

You don't seem aware you'll still have tax and nic liability on your 80k this year. Therefore you won't have 80k to invest in a limited company to be used as a deposit for the mortgage. 

You seem to be focusing on the short term for what is a long term investment. You may pay less tax whilst the money belongs to the company, but what about when you want to withdraw it from the company? What about when it comes time to sell the property? 

Will a brand spanking new limited company even be able to pass mortgage lender checks? 

K_S

@hutch2828 I will start off by saying that I'm not an accountant.

What you are in essence suggesting (at least as I see it) is that you want to use the flexibility provided by a ltd.co. to retain most of your trading profits in the company, and use the retained profits to buy a rental property and build a portfolio over time. That is not uncommon to be honest, there are quite a few clients I know who don't extract any profits from the ltd.co. that will incur a higher rate of tax and use the excess retained profits to invest, either in property or other assets.

My thoughts below are based purely on what I see with ltd.co. director landlord clients who use trading profits to build a property portfolio within a ltd.co.

What most of these clients do is open another limited company to hold the investment properties and then lend money from the trading company to the new company. The new company then uses those funds as a deposit to get a Ltd. Co. BTL mortgage to buy a rental property. 

As I understand it, there are some very good tax related reasons for keeping the trading activities separate from the investment properties. I'm not qualified to expand on these besides mentioning that it involves the potential loss of some reliefs.

From a mortgage point of view, most ltd.co.BTL lenders prefer that the ltd.co. is not carrying out a trade and you will likely need a minimum 25% deposit.

Schwarzwald

I did discuss the same set up with my accountant last year.
you are effectively trying to extract the Trading Company profits in a more tax efficient way vs paying them out to you personally and therefore having to pay dividend income tax.

You will need to set up a second Ltd company which sole purpose is to function as a Property Company to house your BTL portfolio. Most mortgage lenders will not give you a property mortgage against a Trading Company, you need to separate the two businesses.

you can then move your net profits from Trading Company into Propert Company by way of intercompany loan to pay the deposit for the BTL.

having said that, you will end up with two Ltd Companies, corporate BTL mortgages are more expensive and you will have less choice plus might attract highet tax charges.

my assessment was that this only makes economic sense if you aim at building a multi property BTL portfolio, setting up a Ltd for just one property …. Not sure that’s v efficient.