Limited Company & Deceased Assets

tigermarkie

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

I appreciate your time in reading this and any advice anyone has.

Thanks

Mark

DullGreyGuy

tigermarkie said:

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

So you are going to sell the house to a new LTD that has no money and then pay it rent which you will then use to repay the loan to you? What else is the company going to do to generate revenue?

tigermarkie

DullGreyGuy said:

tigermarkie said:

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

So you are going to sell the house to a new LTD that has no money and then pay it rent which you will then use to repay the loan to you? What else is the company going to do to generate revenue?

If I hold the property personally then I have to declare all the income in the tax year that it is earnt. If I hold the company in a Ltd company then I can let the rent accumulate in the Ltd company and then draw down on this at my own desire, either through the DLA or through dividends, avoiding tax at 40%.

silvercar

Varying the will to leave the property to the LtD avoids paying SDLT on a transaction between you and the LTD. I don’t see a reason not to do this.

poseidon1

tigermarkie said:

DullGreyGuy said:

tigermarkie said:

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

So you are going to sell the house to a new LTD that has no money and then pay it rent which you will then use to repay the loan to you? What else is the company going to do to generate revenue?

If I hold the property personally then I have to declare all the income in the tax year that it is earnt. If I hold the company in a Ltd company then I can let the rent accumulate in the Ltd company and then draw down on this at my own desire, either through the DLA or through dividends, avoiding tax at 40%.

Seems your research and reading may  have overlooked that companies pay income tax as well (corporation tax). The rate is 25%, so at this point your saving is only 15%, compared to holding personally.

So each year in administering the company, you will have a corporation tax return to do as well as annual accounts to file with Companies House,  in addition to an annual Confirmation statement (statement of company ownership ). The company accounts and annual corporation tax compliance is a bit of learning curve if you do not know what you are doing.

So at this point your annual rent of £14,400 ( before fees and landlords outgoings such as insurance and general maintenance) reduces to £10,800 after 25% corporation tax..

So let's turn to dividends and tax thereon. Minimally this will be at 8.75% of the dividend declared assuming your other income sources keep you firmly within the basic rate tax band. However this jumps to a dividend rate of 33.75% for 40% tax payers..  For this reason, drawing down on director's loan account probably makes more sense to meet your initial objectives in sheltering rent from 40% personal tax .

 If in future the property were fortunate enough to appreciate in value substantially and you wish to sell, you are currently looking at 25% Corporation tax on the gain. You are mistaken in your belief that the company would have a zero bookcost for the property on its balance sheet. It would have a cost equal to £325k ( plus stamp duty), against which would be debited your DLA ( used to buy the property from yourself) to give a zero opening balance sheet on inception of your  'rental business'.

If you then wanted to access the net cash remaining on liquidating the company, you will probably have the remnants of the director's loan available ( tax free) , but since the opening book cost of the company shareholding is near zero in your hands (based on capitalising it by directors loan), there will be  an additional company liquidation gain ( as distinct from the property gain ) almost equal to the remaining  cash after settling the directors loan account. That would give rise to 18%/24٪ personal cgt rates depending on your status at the time - ie an element of double taxation on the same gain.

Can I suggest you sit down with a qualified tax accountant to discuss the pros and cons of your proposal before proceeding?  I sense a number of serious misconceptions of how company ownership works in the scenario you envisage.

uknick

poseidon1 said:

tigermarkie said:

DullGreyGuy said:

tigermarkie said:

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

So you are going to sell the house to a new LTD that has no money and then pay it rent which you will then use to repay the loan to you? What else is the company going to do to generate revenue?

If I hold the property personally then I have to declare all the income in the tax year that it is earnt. If I hold the company in a Ltd company then I can let the rent accumulate in the Ltd company and then draw down on this at my own desire, either through the DLA or through dividends, avoiding tax at 40%.

Seems your research and reading may  have overlooked that companies pay income tax as well (corporation tax). The rate is 25%, so at this point your saving is only 15%, compared to holding personally.

So each year in administering the company, you will have a corporation tax return to do as well as annual accounts to file with Companies House,  in addition to an annual Confirmation statement (statement of company ownership ). The company accounts and annual corporation tax compliance is a bit of learning curve if you do not know what you are doing.

So at this point your annual rent of £14,400 ( before fees and landlords outgoings such as insurance and general maintenance) reduces to £10,800 after 25% corporation tax..

So let's turn to dividends and tax thereon. Minimally this will be at 8.75% of the dividend declared assuming your other income sources keep you firmly within the basic rate tax band. However this jumps to a dividend rate of 33.75% for 40% tax payers..  For this reason, drawing down on director's loan account probably makes more sense to meet your initial objectives in sheltering rent from 40% personal tax .

 If in future the property were fortunate enough to appreciate in value substantially and you wish to sell, you are currently looking at 25% Corporation tax on the gain. You are mistaken in your belief that the company would have a zero bookcost for the property on its balance sheet. It would have a cost equal to £325k ( plus stamp duty), against which would be debited your DLA ( used to buy the property from yourself) to give a zero opening balance sheet on inception of your  'rental business'.

If you then wanted to access the net cash remaining on liquidating the company, you will probably have the remnants of the director's loan available ( tax free) , but since the opening book cost of the company shareholding is near zero in your hands (based on capitalising it by directors loan), there will be  an additional company liquidation gain ( as distinct from the property gain ) almost equal to the remaining  cash after settling the directors loan account. That would give rise to 18%/24٪ personal cgt rates depending on your status at the time - ie an element of double taxation on the same gain.

Can I suggest you sit down with a qualified tax accountant to discuss the pros and cons of your proposal before proceeding?  I sense a number of serious misconceptions of how company ownership works in the scenario you envisage.

Corporation tax rate is 19% if annual profits below £50k.  From what the OP describes It's unlikely his Ltd would exceeds this. The rest of your post makes eminent sense. 

poseidon1

uknick said:

poseidon1 said:

tigermarkie said:

DullGreyGuy said:

tigermarkie said:

Hi there

I am new to the forum but have enjoyed reading some of the posts on various matters - all very interesting. I believe I have a query that I can't see any advice being given on previously and that is quite niche.

My father unfortunately passed away earlier in the year and as part of his inheritance, left his flat (which is currently rented out for £1,200 pcm) to myself who is his son (& executor of his estate), which is worth around £325k.

Until the budget announcement yesterday, I had set up a Ltd company with a view to transferring the property to my name (as the current will determines) and then simultaneously selling this to the Ltd company. Until yesterday, this would have attracted an additional 3% surcharge on SDLT due to it being a residential property being bought by a Ltd company. Now it appears that this will attract a 5% surcharge (an additional £6.5k compared to yesterday).

The rationale for executing the transaction this way was that from various sources that I have read, without the Ltd company paying a value for the property, I would have unable to create a Director’s Loan Account (DLA) if it was a gift. By creating a DLA, I can draw on that balance tax free (up to £325k) as opposed to paying tax on income / dividends of the first £325k and if I was to sell the property in the future then the market value for corporation tax purposes would be £325k instead of nil.

Given the news yesterday, the SDLT is somewhat onerous to this transaction structure, so I was looking for advice if there is an alternative structure. I could vary my father’s will to leave this straight to the Ltd company but this somewhat leaves me in the same position?

So you are going to sell the house to a new LTD that has no money and then pay it rent which you will then use to repay the loan to you? What else is the company going to do to generate revenue?

If I hold the property personally then I have to declare all the income in the tax year that it is earnt. If I hold the company in a Ltd company then I can let the rent accumulate in the Ltd company and then draw down on this at my own desire, either through the DLA or through dividends, avoiding tax at 40%.

Seems your research and reading may  have overlooked that companies pay income tax as well (corporation tax). The rate is 25%, so at this point your saving is only 15%, compared to holding personally.

So each year in administering the company, you will have a corporation tax return to do as well as annual accounts to file with Companies House,  in addition to an annual Confirmation statement (statement of company ownership ). The company accounts and annual corporation tax compliance is a bit of learning curve if you do not know what you are doing.

So at this point your annual rent of £14,400 ( before fees and landlords outgoings such as insurance and general maintenance) reduces to £10,800 after 25% corporation tax..

So let's turn to dividends and tax thereon. Minimally this will be at 8.75% of the dividend declared assuming your other income sources keep you firmly within the basic rate tax band. However this jumps to a dividend rate of 33.75% for 40% tax payers..  For this reason, drawing down on director's loan account probably makes more sense to meet your initial objectives in sheltering rent from 40% personal tax .

 If in future the property were fortunate enough to appreciate in value substantially and you wish to sell, you are currently looking at 25% Corporation tax on the gain. You are mistaken in your belief that the company would have a zero bookcost for the property on its balance sheet. It would have a cost equal to £325k ( plus stamp duty), against which would be debited your DLA ( used to buy the property from yourself) to give a zero opening balance sheet on inception of your  'rental business'.

If you then wanted to access the net cash remaining on liquidating the company, you will probably have the remnants of the director's loan available ( tax free) , but since the opening book cost of the company shareholding is near zero in your hands (based on capitalising it by directors loan), there will be  an additional company liquidation gain ( as distinct from the property gain ) almost equal to the remaining  cash after settling the directors loan account. That would give rise to 18%/24٪ personal cgt rates depending on your status at the time - ie an element of double taxation on the same gain.

Can I suggest you sit down with a qualified tax accountant to discuss the pros and cons of your proposal before proceeding?  I sense a number of serious misconceptions of how company ownership works in the scenario you envisage.

Corporation tax rate is 19% if annual profits below £50k.  From what the OP describes It's unlikely his Ltd would exceeds this. The rest of your post makes eminent sense. 

Thanks for reminding me the small companies corporation tax rate of 19% had been retained. It lends a little more validity to the OPs proposal to access future rents 'tax free" via DLA.

Potential future double CGT exposure on unwinding this arrangement remains an issue, and I would be concerned about the OP executing and administering this arrangement without expert advice.