T
Tommy
Guest
(This discussion took place on the old AAM
in December 2000. I have reproduced it here so it can be marked as a Key Post.
Tommy
==============
Because it's an old post, some of the tax figures have changed and the decision is no longer as clear cut as it was. Don't make any decision until reading and understanding the full thread - Brendan
boffin11 said ------------------------------
Is there any advantage, tax or otherwise, in using a limited company to hold investment properties (for rental income purposes)?
RainyDay said ------------------------------
Would there be stamp-duty savings when you come to sell the property, i.e. sell the company (not the property itself) and benefit from lower stamp duty rate on share transactions compared to property transactions?
Brendan said ------------------------------
Most advisors recommend owning property personally rather than through a company.
If the company sells the propery, it pays CGT on the gain. If you distribute the money to yourself as the shareholder you will pay income tax at your marginal rate, or at best, you will pay CGT. So there will be a double hit of taxation.
If you leave the rental income in the company you will pay Corporation Tax and a surcharge on undistributed investment income. When you evenutally distribute the rental income to yourself - you will pay either corporation tax or income tax.
Selling the company instead of the property will limit the number of purchasers interested in the property. A propery is easy enough to check out. A company could have undisclosed liabilities. If a company is buying a company which owns the property, it gets even more complicated from a tax and accounting point of view.
Even businesses are advised to buy their business property in their personal names and not through the company. But the case for this is not as strong with CT rates down to 12.5%.
MOB said ------------------------------
The rule of thumb I give people is that if you are buying a capital asset as an investment which you will want to "cash in" at some stage you should buy in your own name. For a trading company, if you are buying an asset which is always going to belong to your business (i.e. a family business which will be handed over), it might make sense to let the company buy it (because otherwise it has to be bought out your after tax income, costing almost twice as much). Because of the lower Corporation Tax rate, assets held within a company will grow more quickly, but it makes little sense to build up property investments within a pure investment (i.e. non trading) company unless you are taking a very very long term investment strategy.
Also, the Stamp Duty saving does not really arise in practice. As Brendan points out there are problems in offloading a company, and these are usually reflected in much higher professional fees on a sale of a company, with both accountants and solicitors getting their trotters in the trough.
Brendan said ------------------------------
I don't want to build up investments for the sake of them. I always look at the eventual money in my hand. Let's say I want to buy an investment property for the ultimate long- term i.e. to leave after me. I will leave a company owning a property and having lots of cash. Wouldn't that be better in my beneficiaries' hands as a property and less cash than a company owning more assets ?
Am I making sense ?
MOB said ------------------------------
I agree with you about company versus personal property holding up to a point. It is the way I personally would go. However, many people are chiefly concerned about accumulating assets and assets will undoubtedly accumulate quicker in a company. There is extra tax when it comes to taking out money, but if that problem is years away, you would be surprised how many people are happy to worry about it later.
Brendan said ------------------------------
I know we are deviating a bit from the original question but...
Some people get a sense of control or power by having lots of assets. However, if these assets are in a company, they are worth less.
If someone wants to build up assets, they could consider setting up a pension fund - it should be more tax efficient.
Back to Boffin's original question.Let's say that I have £100k and want to buy a property for £500k. It is better to do that in my own name than to set up an investment company, to which I would lend the £100k. Do you agree ?
MOB said ------------------------------
I am guilty of over generalising; A pure investment company (if I remember rightly) gets taxed with an extra levy on undistributed income, eroding the benefits outlined below.
However, if you make a few assumptions as follows, the results are not uninteresting:
1. Assume, for the sake of argument that your capital asset generates a return of 7% before tax and is valued at 400,000.
2. Assume that your personal income will be taxed at an average (marginal) rate of 40%. I think this is reasonable, because our hypothetical property owner will have other personal income, so allowances and actual average tax rate on total income are not relevant
3. Assume that corporate income will be taxed at an average of 15%
For the company, after tax return ( 7% less tax @ 15% ) is an effective 6%
For the individual, after tax return ( 7% less tax @ 40%) is an effective 4% (well, 4.2%, but I used 4% in my calculations, so indulge me and yes the other figure should be 5.95%, but I rounded off that as well)
So the first thing is that you have more money going to work for you. The second thing is that if this money is wholly reinvested, it too is getting a higher rate of return under the corporate umbrella. (we are after all talking here of the man who is pre-occupied with accumulating). I'm not much of a man for spreadsheets, but I plugged those figures into Microsoft money and the results are as set out below:
Personally held
10yrs 592k
20yrs 876k
30yrs 1.3m
40yrs 1.9m
Corporate
10yrs 716k
20yrs 1.28m
30yrs 2.3m
40yrs 4.1m
Maybe my assumptions are a little screwy, but the point is that a slightly higher rate of return on the investment will eventually be worthwhile. In the foregoing example it's roughly a dead heat after 40 years for net cash in hand (assuming you liquidate and pay an average of 40% tax on what you take out of the company). From 40 years on, the company is winning on all fronts. It's probably of more relevance to somebody who is building up assets in a trading company, rather than a pure investment scenario.
Newman said ------------------------------
Using a company to purchase the property on behalf of the owner/director is generally most efficient through a pension mortgage.
The company re-pay the principal on the loan capital through the pension fund whilst any rental income pay the interest repayments. At all stages the property is in the ownership of the director. I've yet to see a neater deal!
Brendan said ------------------------------
Hi Newman
Just in case anyone misunderstands your post:
The employee buys the property in his own name. The company doesn't buy the property.
The employee takes out an interest only mortgage and the employee pays the interest on the loan.
The employee receives the rent from the tenant.
The company's only role is in paying into the pension fund. It has no involvement with the property as such.
Pension mortgages for commercial property are discussed more fully at
Jem said ------------------------------
Hi Brendan,
I would sumarise the situation as follows:
If the person is at the present a proprietary director.
1 buys the company in own name interest only mortgage
2 Company pays into pension with same to clear loan.
3 depending on type of property (not house) interest allowed against the rental income.
4 The company gets the tax relief on the pension against its profits.
Note the rental income does not belong to the company it is the persons.
If the person is not a proprietary director and just a "paye employee" or a sole trader there is no point in forming a company for the above as the company has no income to set the pension against.
If the later is the situation you can still take out an interest onlyloan and pay into the pension to clear same however you will only be able to get tax relief up to your limits ie
up to 30 years 15% of net relevant earnings
30-40 20%
40-50 25%
50 years up 30%
note all pensions are taken into account and also rental income is not taken into account in calculating nre.
Hope I have been somewhat clear
jem
in December 2000. I have reproduced it here so it can be marked as a Key Post.
Tommy
==============
Because it's an old post, some of the tax figures have changed and the decision is no longer as clear cut as it was. Don't make any decision until reading and understanding the full thread - Brendan
boffin11 said ------------------------------
Is there any advantage, tax or otherwise, in using a limited company to hold investment properties (for rental income purposes)?
RainyDay said ------------------------------
Would there be stamp-duty savings when you come to sell the property, i.e. sell the company (not the property itself) and benefit from lower stamp duty rate on share transactions compared to property transactions?
Brendan said ------------------------------
Most advisors recommend owning property personally rather than through a company.
If the company sells the propery, it pays CGT on the gain. If you distribute the money to yourself as the shareholder you will pay income tax at your marginal rate, or at best, you will pay CGT. So there will be a double hit of taxation.
If you leave the rental income in the company you will pay Corporation Tax and a surcharge on undistributed investment income. When you evenutally distribute the rental income to yourself - you will pay either corporation tax or income tax.
Selling the company instead of the property will limit the number of purchasers interested in the property. A propery is easy enough to check out. A company could have undisclosed liabilities. If a company is buying a company which owns the property, it gets even more complicated from a tax and accounting point of view.
Even businesses are advised to buy their business property in their personal names and not through the company. But the case for this is not as strong with CT rates down to 12.5%.
MOB said ------------------------------
The rule of thumb I give people is that if you are buying a capital asset as an investment which you will want to "cash in" at some stage you should buy in your own name. For a trading company, if you are buying an asset which is always going to belong to your business (i.e. a family business which will be handed over), it might make sense to let the company buy it (because otherwise it has to be bought out your after tax income, costing almost twice as much). Because of the lower Corporation Tax rate, assets held within a company will grow more quickly, but it makes little sense to build up property investments within a pure investment (i.e. non trading) company unless you are taking a very very long term investment strategy.
Also, the Stamp Duty saving does not really arise in practice. As Brendan points out there are problems in offloading a company, and these are usually reflected in much higher professional fees on a sale of a company, with both accountants and solicitors getting their trotters in the trough.
Brendan said ------------------------------
I don't want to build up investments for the sake of them. I always look at the eventual money in my hand. Let's say I want to buy an investment property for the ultimate long- term i.e. to leave after me. I will leave a company owning a property and having lots of cash. Wouldn't that be better in my beneficiaries' hands as a property and less cash than a company owning more assets ?
Am I making sense ?
MOB said ------------------------------
I agree with you about company versus personal property holding up to a point. It is the way I personally would go. However, many people are chiefly concerned about accumulating assets and assets will undoubtedly accumulate quicker in a company. There is extra tax when it comes to taking out money, but if that problem is years away, you would be surprised how many people are happy to worry about it later.
Brendan said ------------------------------
I know we are deviating a bit from the original question but...
Some people get a sense of control or power by having lots of assets. However, if these assets are in a company, they are worth less.
If someone wants to build up assets, they could consider setting up a pension fund - it should be more tax efficient.
Back to Boffin's original question.Let's say that I have £100k and want to buy a property for £500k. It is better to do that in my own name than to set up an investment company, to which I would lend the £100k. Do you agree ?
MOB said ------------------------------
I am guilty of over generalising; A pure investment company (if I remember rightly) gets taxed with an extra levy on undistributed income, eroding the benefits outlined below.
However, if you make a few assumptions as follows, the results are not uninteresting:
1. Assume, for the sake of argument that your capital asset generates a return of 7% before tax and is valued at 400,000.
2. Assume that your personal income will be taxed at an average (marginal) rate of 40%. I think this is reasonable, because our hypothetical property owner will have other personal income, so allowances and actual average tax rate on total income are not relevant
3. Assume that corporate income will be taxed at an average of 15%
For the company, after tax return ( 7% less tax @ 15% ) is an effective 6%
For the individual, after tax return ( 7% less tax @ 40%) is an effective 4% (well, 4.2%, but I used 4% in my calculations, so indulge me and yes the other figure should be 5.95%, but I rounded off that as well)
So the first thing is that you have more money going to work for you. The second thing is that if this money is wholly reinvested, it too is getting a higher rate of return under the corporate umbrella. (we are after all talking here of the man who is pre-occupied with accumulating). I'm not much of a man for spreadsheets, but I plugged those figures into Microsoft money and the results are as set out below:
Personally held
10yrs 592k
20yrs 876k
30yrs 1.3m
40yrs 1.9m
Corporate
10yrs 716k
20yrs 1.28m
30yrs 2.3m
40yrs 4.1m
Maybe my assumptions are a little screwy, but the point is that a slightly higher rate of return on the investment will eventually be worthwhile. In the foregoing example it's roughly a dead heat after 40 years for net cash in hand (assuming you liquidate and pay an average of 40% tax on what you take out of the company). From 40 years on, the company is winning on all fronts. It's probably of more relevance to somebody who is building up assets in a trading company, rather than a pure investment scenario.
Newman said ------------------------------
Using a company to purchase the property on behalf of the owner/director is generally most efficient through a pension mortgage.
The company re-pay the principal on the loan capital through the pension fund whilst any rental income pay the interest repayments. At all stages the property is in the ownership of the director. I've yet to see a neater deal!
Brendan said ------------------------------
Hi Newman
Just in case anyone misunderstands your post:
The employee buys the property in his own name. The company doesn't buy the property.
The employee takes out an interest only mortgage and the employee pays the interest on the loan.
The employee receives the rent from the tenant.
The company's only role is in paying into the pension fund. It has no involvement with the property as such.
Pension mortgages for commercial property are discussed more fully at
Jem said ------------------------------
Hi Brendan,
I would sumarise the situation as follows:
If the person is at the present a proprietary director.
1 buys the company in own name interest only mortgage
2 Company pays into pension with same to clear loan.
3 depending on type of property (not house) interest allowed against the rental income.
4 The company gets the tax relief on the pension against its profits.
Note the rental income does not belong to the company it is the persons.
If the person is not a proprietary director and just a "paye employee" or a sole trader there is no point in forming a company for the above as the company has no income to set the pension against.
If the later is the situation you can still take out an interest onlyloan and pay into the pension to clear same however you will only be able to get tax relief up to your limits ie
up to 30 years 15% of net relevant earnings
30-40 20%
40-50 25%
50 years up 30%
note all pensions are taken into account and also rental income is not taken into account in calculating nre.
Hope I have been somewhat clear
jem
