Deed of trust property company tax question

by Readers Question

22:45 PM, 17th September 2013
About 5 years ago

Deed of trust property company tax question

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Deed of trust property company tax question

I have a limited company registered in England.

I purchased a buy-to-let flat in England and it is registered in Land Registry in my personal name. It is my intention to renovate the flat and sell it with a tidy profit.

The lawyers drew up a Trust Deed at the time of purchase of the flat and I am the Trustee.

The deed records that I (as Trustee) acknowledge that I hold the property on trust for the Grantee (the Company) and that all income from the property shall belong to the Grantee.

Questions:

1. Should the flat be reflected as a Fixed asset in the financial statements of the Company?
2. When I sell the flat (at a profit), should the profit on sale be reflected as income in the financial statements of the Company?

I appreciate any help Deed trust property company tax question

Regards

Bruce



Comments

Neil Barlow FCCA ATT

11:35 AM, 18th September 2013
About 5 years ago

Your query states that you have a UK based company. You have also said that the company is the beneficial owner of a "buy to let" flat but you personally hold the legal title to the property on trust for the company. However, your question says that your intention is to renovate the flat and sell it on. So what is your intention here, to let the flat or develop it and sell it on? Incidentally, property developers are part of the Construction Industry Scheme. Without understanding your intentions, it is not possible to answer your query.

The questions that you have asked are questions a good accountant should be able to discuss with you and advise you on. Out of interest, do you have an accountant? Who will be dealing with the company's annual reporting requirements?

I would be interested to understand the reasons behind your decision to hold the buy to let flat in a corporate structure. Did you take any professional advice prior to setting this up? Does your company have a trade? What are your future plans for the company? I am always careful not to give any specific advice when I am not in possession of all of the facts so would suggest that you seek professional advice tailored to your specific circumstances. We are a firm of Chartered Accountants and we will be happy to give you an initial no obligation free consultation to discuss your circumstances and the services that we will be able to provide to you should this be of interest.

Puzzler

16:39 PM, 18th September 2013
About 5 years ago

Reply to the comment left by "Neil Barlow FCCA ATT" at "18/09/2013 - 11:35":

The second sentence says he intends to renovate and sell.

Mike

16:48 PM, 18th September 2013
About 5 years ago

Reply to the comment left by "Puzzler " at "18/09/2013 - 16:39":

Hi is there a benefit to hold properties in trust I have at present 3 letting properties which are presently owned in partnership with my wife. Could these be transferred to a trust which includes children or would it all cost with no real advantage.

Neil Barlow FCCA ATT

17:05 PM, 18th September 2013
About 5 years ago

Reply to the comment left by "Puzzler " at "18/09/2013 - 16:39":

Yes, Bruce has said that his intention is to renovate the flat and sell at a tidy profit. However, Bruce also says that he has purchased "buy to let" flat, hence my confusion.

If Bruce's intention was to buy a property and develop this with a view to selling it on at a profit this may be treated very differently than if he had bought the property with a view to letting it only to do it up and sell on at a later date. Only a detailed discussion with Bruce will enable the questions that he has asked to be answered. Again, I would recommend that he seeks professional advice on this matter.

Tony Atkins

9:28 AM, 19th September 2013
About 5 years ago

I agree with Neil Barlow's comments: this is a complex area of tax law as "investments" like BTL are treated quite differently from "trading", which is buy-renovate-sell.

My copy of Carl Bayley's Using a Property Company to Save Tax says there are few advantages in using a limited company if you are an investor, and the advantages for developers/traders only kick in over several years and several projects. You can operate a hybrid company that mixes investment income and development trading via renovation or new-build, but you need to get the balance right for the outcomes you are seeking. You need to get your intentions clear at the start, otherwise you can get in a terrible mess with HMRC.

The flat should definitely be recorded as an asset of the company. And of course when you sell the flat, it must be recorded in the company's trading income - why would it not be? How else are you going to account for it? Your accountant will then work out the net profits on that income, after deductible costs and corporation tax on the company, and you then need to work out how you intend to extract the profits from the company, usually in the form of salary and bonuses or shareholder dividends.

Neil Barlow FCCA ATT

10:06 AM, 19th September 2013
About 5 years ago

Reply to the comment left by "Tony Atkins" at "19/09/2013 - 09:28":

Tony, just a couple of points to add to your post if I may.

"The flat should definitely be recorded as an asset of the company." Yes, this might be the correct treatment, but the property could also be stock and work in progress rather than a fixed asset.

"And of course when you sell the flat, it must be recorded in the company’s trading income." Or alternatively, might this be a profit or loss on disposal of a fixed asset?

Again, it all comes back to what is happening or has happened here. Without a full discussion with Bruce, taking account of all of the facts, it is not possible to advise him or answer his query.

I do agree with you that for many investors a corporate structure is unnecessary as it adds another level of complexity. For all property developers CIS is an issue, but companies will also have company secretarial, corporation tax, and potentially payroll matters to deal with and I would recommend that the advice of a good accountant is sought on these matters (including how to extract any profits from the company tax efficiently). I have offered Bruce the opportunity for a free no obligation initial consultation to discuss his query and the services that we will be able to offer to him. Of course, this offer is also open to any reader who may have a tax or accountancy query and may wish to seek some specialist advice.

Bruce Allsobrook

10:13 AM, 19th September 2013
About 5 years ago

Sorry for the confusion Neil - the previous owner had this properrty as a "buy-to-let" - my intention was to "buy-renovate-sell" as Tony states above.
I have been told by a chartered accountant firm that, as the property is registered in my name with Land Registry, it must NOT be shown as an asset in the Company's financial statements, and the profits on sale would be added to my personal tax return.

My thoughts when I planned to buy the property to renovate and sell, was to buy it in my name (easier to get the financing I needed) - but to have the Trust Deed drawn up by the solicitors at the time of purchase, so that the profits on the sale would be at small company rates, and not at my personal 40% rate.
Thus I expected that property to be included as an asset in the company accounts nad in the financial statements at year end. In the following financial year when the property as sold, profit on sale (less solicitor costs, agents commisisons, rneovation costs) would be in the name of the Company and tax at 20% would be payable.

To my surprise, the accountants said that the profit should go against my personal tax return (Capital Gains Tax rate) and that the property must NOT be shown as an asset in the financial statements.

Hence my concern and request for comments and advice on this forum
Regards Bruce

Bruce Allsobrook

19:04 PM, 19th September 2013
About 5 years ago

Reply to the comment left by "Mike " at "18/09/2013 - 16:48":

Hi Mike
I cannot comment on your situation, but I can tell you what I have done, and the reasoning behind my actions.
I was on a 40% tax bracket, and wanted to do my property trading in a limited company and so only pay small company tax rates (around 20%).
I found it easier to do financing in my name, so my solicitors set up a Trust Deed that I was holding the property as a Trustee for the limited company.
If I were to have a rental property, the net profits on rentals would also therefore be at the company 20% tax rate and not my 40% bracket.

With your situation, there may be an advantage of doing the same, as you could have your children as shareholders - and IF your property portfolio becomes so large that you exceed the death duties limits, you may save tax when you die.
Please however, get professional advice before you do anything and check out costs and potential savings to make sure you have a chance of saving in the long and possibly also short term.

Tony Atkins

0:56 AM, 20th September 2013
About 5 years ago

Reply to the comment left by "Bruce Allsobrook" at "19/09/2013 - 10:13":

Bruce - I am surprised at your accountant's recommendations. I have been running a development company in a similar situation to yours for several years. I bought three houses using BTL mortgages in my personal name just like you, with a Deed of Trust drawn up my solicitors confirming that I owned them on behalf of my limited company. My accountants have never had a problem with this arrangement. All purchase-related and subsequent costs were recorded in the company accounts, and the houses listed as Assets, by which I and my accountants meant working stock, not the long-term Fixed Assets referred to by Neil.

I then rented out the houses while seeking planning permission to knock them down and build some new-builds; one house was renovated as you are doing. The rent meant the company was not a "pure" development business but a hybrid - part-investment, part-development. You need to be careful that the investment/rental side does not come to dominate: it strongly affects your ability to reclaim VAT and the tax treatment of your profits. As long as you keep buying, renovating and selling, and only receive rent as a relatively incidental income, you will be fine.

Does your accountant actually understand what you are doing, because it sounds to me as if they think you are running an investment business? This is why they'd conclude there's no point in putting it through a limited company and you should be taxed under personal CGT. You need to emphasise that you are trading, with the intention of paying 20% corporation tax and taking out your profits in the form of dividends or other tax-efficient arrangements as Neil suggests. Or just change your accountant . . .

Bruce Allsobrook

7:32 AM, 20th September 2013
About 5 years ago

Thank you for your comments above Neil.
You are confirming what I have thought, and also what Tony has stated, that the property MUST be treated as an ASSET in the Company books, and NOT in my personal name. I also agree with your proviso, that if I was retaining the property for rental income, then it would be a Fixed Asset; and as I did with this property specifically, buying to renovate and sell, it should have been treated as a Current Asset (Stock & Work in Progress for the renovations,

In overall, I guess the outcome should be that the present accountants should be dismissed, and the shareholders appoint a new firm of Chartered Accountants to re-do the annual financial statements and write to HMRC to explain the situation and to re-submit income tax returns.

What a waste of money - I must also consider reporting my complaint to the ICAEW.

Thank you to both for your comments and advice.
Any final advice or comments?

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