Using my Ltd Companies Money to Build a Cow Shed

I have a limited company and was wondering if it is wise to use the profit to build a cow shed on my dairy farm and then the farm could pay my company a rent each year. The farm could eventually purchase the shed from my company.

I understand that my company would not own the land but would own the shed and this would be considered an asset of the comapany.

Thus instead of the farm getting a loan to build the shed I want to use the money I have in my company.

What are the pitfalls here and is it a good or bad idea??

Surely in the absence of any legal arrangement otherwise, the individual who owns the land also owns any structures built on it. And I definitely don't see how the owner of land can pay rent to someone for the use of (a structure on) their own land...

In which case for tax purposes the company will have made a loan / distribution to you.

The bottom line is this is probably not a runner, but farming is not an area I'd profess to know a whole lot about so I'd be interested to hear what some of the other regulars here reckon...

I have a limited company and was wondering if it is wise to use the profit to build

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I think that you need to sit down with your accountant and discuss the whole nature of profit and capital and cash.

You can run your idea by them at the same time. Hopefully, he will dissuade you from such a complex arrangement. Or he might encourage you to implement it and then fleece you for fees for administering the tax implications of it over the next 20 years.

Brendan

mandelbrot said:

Surely in the absence of any legal arrangement otherwise, the individual who owns the land also owns any structures built on it. And I definitely don't see how the owner of land can pay rent to someone for the use of (a structure on) their own land

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I agree with what your saying and this does seem to be the main complication but apparently not a show stopper. From what I can gather no legal arrangement needs to be in place. The land belongs to the farmer & the structure to the company.

I have recently taken over this farm from my father and the farm needs investment so I do not see why I need to get a loan if I have the money in my company. I need to invest the money from my company and who better to invest it in but myself!

Brendan Burgess said:

I think that you need to sit down with your accountant and discuss the whole nature of profit and capital and cash.

You can run your idea by them at the same time. Hopefully, he will dissuade you from such a complex arrangement. Or he might encourage you to implement it and then fleece you for fees for administering the tax implications of it over the next 20 years.

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Thanks Brendan. It is obviously not something I would do lightly and without sounding out all the complications, but at the same time I am interested in investigating the possibility. I have a feeling I might know what the conclusion will be but If you dont ask you cant learn.

Lethal83 said:

I agree with what your saying and this does seem to be the main complication but apparently not a show stopper. From what I can gather no legal arrangement needs to be in place. The land belongs to the farmer & the structure to the company.

I have recently taken over this farm from my father and the farm needs investment so I do not see why I need to get a loan if I have the money in my company. I need to invest the money from my company and who better to invest it in but myself!

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I'm unconvinced that you are right, but assuming for a minute you are and the legal ownership isn't an issue...:

AFAIK there will be no means by which the company can't claim back the VAT on the building.

It will have to charge a market rent to the director/farmer. This will result in taxable rental income in the company at 25%, and close company surcharge on top of it, so effectively the company will pay tax at near income tax levels on the rent.

There may be problems with availability of capital allowances that would be available if the building was built / owned by the farmer, I'm not sure off the top of my head though.


Now, returning to the main concern - let's say God forbid you die next year after the company has built this monstrosity on your land. What happens then? Title to the land is passed on, but the company continues to own the building? I don't see how this flies to be honest.

There are many instances whereby a company builds property on it's directors lands, not just farming cases. (This should be noted in the Company accounts). In effect it's a freehold building on a leasehold of land.
However Farming is different and my suggestion for you to consider is as follows,
Build the shed yourself ,
As an unregistered farmer, you can claim the VAT back.
As a farmer you can also claim back capital allowances on it.
Rent it to your company at a rate which cover the repayments on the shed which in turn should match the capital allowances claimed each year. ie Tax neutral.(Would need to check this!)

At the expiry of capital allowances, you could then consider selling the shed to the company (and pay CGT) or if you are in a position, claim retirement relief to extract monies efficiently from the company.
Just a quick off the cuff reply for you, so don't hold me on it!

rocksider said:

There are many instances whereby a company builds property on it's directors lands, not just farming cases. (This should be noted in the Company accounts). In effect it's a freehold building on a leasehold of land.

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Where's the leasehold of land though? If the director decides to sell the land once the shed is built, complete with building on it, what's to stop him?