Setting up Ltd to purchase and manage B2L properties

[movietub]

Hi,

I've operated an Ltd for 10 years+ now and our profits have started to regularly exceed what we can take out as dividends without paying a lot of tax. We also have no pension plans, so we're looking at the potential of starting a Ltd to purchase properties as a potential alternative to paying into a traditional pension scheme.

The reasons for property are two fold. 1) We only work approx 2 days a week on our current business, so have plenty of time and practical skill to renovate and improve properties we buy. 2) We're aware that recent changes in taxation have made life less attractive for casual/private landlords which make setting up a more ambitious Ltd all the more attractive to us (our belief being that a tougher barrier to entry means those that make it through, reap higher rewards).

My questions are...

1) Is there an established, even if convoluted way, to take money from our existing company to invest in the new (possibly subsidiary) and avoid paying CT? Happy to do it as a loan or purchase of shares, whatever works out best for tax long term.

2) Am I right in thinking that as each properties value (hopefully) increases, the increase is added to the balance sheet and CT is payable, instead for the CG that would be payable on a privately owned property once it is disposed of? IE within a Ltd CG = CT, not both?

3) Any other differences specific to the handling of and accounting for property within a Ltd that I should be looking into?

Our accountant is on leave for the next week and I wanted to get my head around the obvious questions ahead of paying to sit down and go through the nitty gritty of our plan with her...

Thanks in advance for any input

 

[STDFR33]

1) loan
2) corporation tax
3) CIS, VAT, capital allowances etc.

 

[movietub]

1) loan
2) corporation tax
3) CIS, VAT, capital allowances etc.

Thanks. So We loan the money to the new company on whatever (reasonable) terms we wish?

Corp tax instead of CG, seemed obvious but best to check!

Why CIS though? No construction intended other than general decorating and fitting out that we would do ourselves. We will occasionally need to pay a plasterer for a few days work but nothing approaching regular hours etc. Any idea what the limits are for what we can do without CIS?

I'm cautious of CIS as we were told years ago we had to register for the scheme for our other work, and then years later it was proven this was cobblers! Even though, to this day, most people still assume we do need to...

 

[STDFR33]

https://www.gov.uk/what-you-must-do-as-a-cis-contractor/who-is-covered-by-cis

 

[UK Contractor Accountant]

You will need to work out if the new co is to be trading company or an investment company!

Trading Co= property development company, buy, develop, renovate then sell (trading profits)
Investment Co - properties held for long term investment gain (capital gain).

There are different accounting & tax laws applying to trading co & investment companies.

 

[movietub]

https://www.gov.uk/what-you-must-do-as-a-cis-contractor/who-is-covered-by-cis

Thanks - Can't see that we would qualify as we're not going to be a property developer, and a few other reasons. However, I'll start an email chain with CIS to ensure this is the case - and to have something to fall back if it's ever raised.

Most of the value we will add to properties will come from general cosmetic improvements and decorating etc. We're not about to buy an old townhouse and split it into 6 flats or anything remotely worthy of being a construction project.

 

[movietub]

You will need to work out if the new co is to be trading company or an investment company!

Trading Co= property development company, buy, develop, renovate then sell (trading profits)
Investment Co - properties held for long term investment gain (capital gain).

There are different accounting & tax laws applying to trading co & investment companies.

Thanks.

We are 100% investment. The business will exist to purchase poorly cared for properties, improve them back to an above average standard and then seek a decent rent. The long term goal is to have several properties accruing value whilst also taking a revenue from the rent. It's most definitely investment.

I assume that means we 'pay as we go' tax on the steady rise in the property each year, less whatever operating expenses, mortgage interest etc?

 

[UK Contractor Accountant]

I assume that means we 'pay as we go' tax on the steady rise in the property each year

No, only pay tax when you sell them.

Pay tax on the net rental income each year.

 

[movietub]

No, only pay tax when you sell them.

Pay tax on the net rental income each year.

Fantastic. And that still applies if we're remortgaging every few years?

IE we buy a £200k house with £50k deposit, the rest on mortgage (interest only). 20 years later we sell for £350k, but we have re-mortgaged every 2 years so still only own approx 25%.

So would the profit be the increase in the 25% that we actually 'own'? Of on the £150k increase in the overall value of the house?

And if it's the overall value increase, is the 'profit' calculated to allow for inflation on the original purchase price?

Thanks for all your input

 

[UK Contractor Accountant]

https://www.gov.uk/tax-when-your-company-sells-assets/work-out-a-chargeable-gain

 

[movietub]

https://www.gov.uk/tax-when-your-company-sells-assets/work-out-a-chargeable-gain

That makes complete sense - thanks once again!

 

[NCapital]

...which make setting up a more ambitious Ltd all the more attractive to us (our belief being that a tougher barrier to entry means those that make it through, reap higher rewards).

A bit of an aside, I know, but what makes you think this? As someone who's been thinking of rental properties as well, and having seen the recent changes in the related tax laws, I have to say I've been put off somewhat. What makes you think that you'll reap higher rewards if you manage to succeed in renting out properties despite the extra difficulty the new laws impose?

 

[movietub]

A bit of an aside, I know, but what makes you think this? As someone who's been thinking of rental properties as well, and having seen the recent changes in the related tax laws, I have to say I've been put off somewhat. What makes you think that you'll reap higher rewards if you manage to succeed in renting out properties despite the extra difficulty the new laws impose?

You kinda just answered your own question and also reinforced by view. As you say, new tax laws and you've been put off. By making it harder, more people are of course deterred. But there is little in this world that is a better example of supply and demand than property. So... It's all the more on the table for those that look at why the government has made the changes, understand the cause, and configure a business to suit.

To be honest property has always been a fantastic investment, long term. If you ignore all the press nonsense about bust and boom through the decades, the raw facts are that within the life of most mortgage terms or property company operations, the values rise ahead of inflation (in the UK). So virtually any hoop is worth jumping to get in, so long as you set it up correctly as there is of course a lot of money involved.

I've found in business in general, it's best to throw conventional wisdom and common sense out the window - and instead analyse how the convoluted problem really operates and design a solution to fit in with it! And that is the hard part, but that's what business is all about for me, the thought ahead of action.

 

[NCapital]

You kinda just answered your own question and also reinforced by view. As you say, new tax laws and you've been put off. By making it harder, more people are of course deterred. But there is little in this world that is a better example of supply and demand than property. So... It's all the more on the table for those that look at why the government has made the changes, understand the cause, and configure a business to suit.

To be honest property has always been a fantastic investment, long term. If you ignore all the press nonsense about bust and boom through the decades, the raw facts are that within the life of most mortgage terms or property company operations, the values rise ahead of inflation (in the UK). So virtually any hoop is worth jumping to get in, so long as you set it up correctly as there is of course a lot of money involved.

You might be onto something there, but I couldn't initially see how making things more difficult would mean that anyone who manages to do it would reap more of a reward than if things hadn't been made more difficult.

You're totally right when you say that property has, overall, been a really good investment over the long term, and I'm sure that'll continue in the long run. The reason I was deterred is because the tax I'd pay on any rental income would mean that there wouldn't be enough left over to pay the mortgage on the property, which makes the whole exercise pointless. Even if I didn't need a mortgage to own the property, a large chunk of rental income would be taken in tax, meaning it's still not as profitable now as it once was.

You could buy the properties through a limited company and only get taxed corporation tax on the income, but if Labour win the next election, they could raise the corporation tax rate to 26%. And on top of that, if you want to withdraw what's left from the company, you'd be taxed on that too.

At the end of the day, the new laws mean more of our money gets taken in tax, so I still can't see how actually managing to succeed in the rental sector means you'd reap more of a reward than previously, simply because more people are put off trying. If anything, being successful now means you'd end up with smaller profits than before.

I get what you're saying about the new rules putting people off and leaving room for the "more determined", shall we say. It's almost a case of sorting the wheat from the chaff... if things are harder to achieve, then the ones that do achieve it have done so because they're more determined, resourceful, and practical, etc. And that's fine. I just think that what we can consider a "success" now amounts to a lot less than it did before the new tax laws took effect.

 

[movietub]

You might be onto something there, but I couldn't initially see how making things more difficult would mean that anyone who manages to do it would reap more of a reward than if things hadn't been made more difficult.

You're totally right when you say that property has, overall, been a really good investment over the long term, and I'm sure that'll continue in the long run. The reason I was deterred is because the tax I'd pay on any rental income would mean that there wouldn't be enough left over to pay the mortgage on the property, which makes the whole exercise pointless. Even if I didn't need a mortgage to own the property, a large chunk of rental income would be taken in tax, meaning it's still not as profitable now as it once was.

You could buy the properties through a limited company and only get taxed corporation tax on the income, but if Labour win the next election, they could raise the corporation tax rate to 26%. And on top of that, if you want to withdraw what's left from the company, you'd be taxed on that too.

At the end of the day, the new laws mean more of our money gets taken in tax, so I still can't see how actually managing to succeed in the rental sector means you'd reap more of a reward than previously, simply because more people are put off trying. If anything, being successful now means you'd end up with smaller profits than before.

I get what you're saying about the new rules putting people off and leaving room for the "more determined", shall we say. It's almost a case of sorting the wheat from the chaff... if things are harder to achieve, then the ones that do achieve it have done so because they're more determined, resourceful, and practical, etc. And that's fine. I just think that what we can consider a "success" now amounts to a lot less than it did before the new tax laws took effect.

The new laws mean that an Ltd can recoup interest paid against rental income, whereas an individual cannot. But interest as an expense aside, it's always been the case that tax on the income has to be paid by ltd or individual. I think the government is essentially looking to deal with problems caused by greedy or lazy landlords by bumping as much of the rental market as possible over from the private into the corporate sector. And also perhaps help the 'rich people have multiple homes' figures to reduce.

As for the announced intent by Labour to raise CT... They seem to have chosen a rather radical set of policies on the off chance off an election win. I doubt they will win - I think most people care more about keeping the established current government in place through the brexit transition rather than the specific policies of that government. But if Labour did win, and they did raise CT by a frankly shocking 7%, the reality is it would hurt but it would be dealt with - it wouldn't make my model unworkable. Got to remember that whenever times are tough in business they are tough for everyone, so the relative impact is less than the headline impact. And of course if several thousand ltd's with property interest all pay more CT, you can assume at least part of the difference will be made up with rents rising one way or another over the preceding years.

Truth is, we build a business for today. And if tomorrow brings change, we change. And if we're too old/tired/useless to change, business fails. If you're serious about getting into property, then the circumstances of the market today, or what may change tomorrow are VERY likely to have less of an affect on your plans than delaying will do. On a 200k house that CT rise would cost you hundreds in net income from rent but in the same year the house will accrue far more value. Even if it's a bad year, or bad 7 years, they may well still be worthwhile years.

Property = safe long term bet. Useless if you need to make money from it in the short term though. Anyone who remortgaged ahead of the last crash will attest to that! But those that bought in 1997... Guess what? Crash and all, and different tax rules, 20 years later their property is now worth more than twice what they paid and has easily smashed the index linked rate of inflation.

 

[billmccallum1957]

"Property = safe long term bet. Useless if you need to make money from it in the short term though. Anyone who remortgaged ahead of the last crash will attest to that! But those that bought in 1997... Guess what? Crash and all, and different tax rules, 20 years later their property is now worth more than twice what they paid and has easily smashed the index linked rate of inflation."

Not entirely true... I re-mortgaged on a BTL mortgage when my property was valued at £100K (2007), its now looking at around $60K-£65K, nothing smashed.

 

[movietub]

"Property = safe long term bet. Useless if you need to make money from it in the short term though. Anyone who remortgaged ahead of the last crash will attest to that! But those that bought in 1997... Guess what? Crash and all, and different tax rules, 20 years later their property is now worth more than twice what they paid and has easily smashed the index linked rate of inflation."

Not entirely true... I re-mortgaged on a BTL mortgage when my property was valued at £100K (2007), its now looking at around $60K-£65K, nothing smashed.

Read again - that was my point. You took the value out at a high point. If you had bought it 20 years ago and not done so, it would indeed have smashed index linked inflation norms. Unless it is in an area that has collapsed financially etc.

Also, thinking back - in 2007 there was much talk about boom and bust. There was at least one TV documentary about people remortgaging because of booming house prices and there was so much press about potential bust that Gordon Brown came out and announced he had abolished it.. Just out of interest, against that backdrop, why did you remortgage then?

I'm putting the above question into the context of this thread - which is discussing potential, far less impactful current possibilities within the property market (because it has yet to fully recover).

 

[NCapital]

The new laws mean that an Ltd can recoup interest paid against rental income, whereas an individual cannot. But interest as an expense aside, it's always been the case that tax on the income has to be paid by ltd or individual. I think the government is essentially looking to deal with problems caused by greedy or lazy landlords by bumping as much of the rental market as possible over from the private into the corporate sector.

Ah, I didn't realize that limited companies can still recoup interest paid. That makes a difference. I do wonder, though, what difference moving everything over to the corporate sector makes. I mean, if you take a greedy/lazy landlord and make things tougher for them to continue, would they not simply start a limited company themselves and carry on as normal, but under the umbrella of the company? You'd still have a greedy/lazy landlord running the show, at the end of the day!

As for the announced intent by Labour to raise CT... They seem to have chosen a rather radical set of policies ... But if Labour did win, and they did raise CT by a frankly shocking 7%, the reality is it would hurt but it would be dealt with - it wouldn't make my model unworkable. Got to remember that whenever times are tough in business they are tough for everyone, so the relative impact is less than the headline impact. And of course if several thousand ltd's with property interest all pay more CT, you can assume at least part of the difference will be made up with rents rising one way or another over the preceding years.

Yeah, and I suspect that'll bring its own problems. Raising rent to cover higher taxes will simply price the rental homes out of the reach of ordinary people. I can only speak for the situation in my local area, but I know that people who rent homes have to pay rather extortionate rates as it is... so if those rates increased to cover higher CT, many people would end up homeless.

Truth is, we build a business for today. And if tomorrow brings change, we change. And if we're too old/tired/useless to change, business fails. If you're serious about getting into property, then the circumstances of the market today, or what may change tomorrow are VERY likely to have less of an affect on your plans than delaying will do. On a 200k house that CT rise would cost you hundreds in net income from rent but in the same year the house will accrue far more value. Even if it's a bad year, or bad 7 years, they may well still be worthwhile years.

Yeah, I guess that's all you can do really. Build for today, plan for tomorrow. As you say, things change, and we just have to deal with it. But I do think that it'd be silly to completely ignore possibilities that may occur in the near future. I know we can't predict the future completely, and not being able to predict the future shouldn't stop us from trying, but I think it's worth bearing in mind.