Start up advice please for a property business?

by Readers Question

13:46 PM, 24th October 2016
About 2 years ago

Start up advice please for a property business?

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Start up advice please for a property business?

First of all, thank you for creating and managing the web site which I find very useful in this changing environment. I have read most (if not all) of the articles trying to get my head around all the current and new requirements and I still have so many questions. I hope I can get an advice on how to take things further as I believe in getting things right from the start.start up

I am currently a contractor (business consultant via my Ltd company) and my partner is self-employed (builder). I also have a rented property (only on my name) and we have a joint residential mortgage. We are looking into starting a property business and for this purpose the best option seems to be (correctly if I am completely getting this wrong) by setting up a new Ltd company with both of us as directors. Some of the funds for the new company will be borrowed from my consultancy company.

It becomes more complicated in terms of accountancy and tax at this point and we struggle to find a good advisor to cover all this. It seems that there are more options for married couples as well (such as share ownership transfer).

I read about the Declaration of Trust and was wondering whether this may be an option for my current rented flat.

Thank you

Desi



Comments

Neil Patterson

13:54 PM, 24th October 2016
About 2 years ago

Hi Desi,

Thank you very much 🙂

Everyone's tax position is different and whether you use a Declaration of Trust or not on your current rented property depends on both your current tax statuses and incomes. Please see >> https://www.property118.com/ownership-restructuring-for-tax-purposes/

Profits and mortgage costs can be managed between spouses by transferring the beneficial interests in property using a declaration of trust. The optimal split ensures both spouses utilise their up to their full £43,000 annual allowance as basic rate tax-payers. Once this is fully utilised it makes sense to form a Limited Company for any future purchases of rental property.

HMRC’s default position for taxation of rental income from jointly owned properties is that rental profit is split 50/50. This can be amended to any share (e.g. 99%/1%) subject to a declaration of trust and filing a Form 17 with HMRC.

Where property is owned by one person a declaration of trust can also be used to split the beneficial ownership between spouses. In that case Form 17 would not be applicable but HMRC would need to be informed of the arrangement and you would each need to complete tax returns for your share of rental profits in future years.

You are correct that a great accountant who understands property is always a good idea so you may like to see our Accountants Introduction Request at the very bottom of our Tax Planning page >> https://www.property118.com/tax/

Tanya WWW

15:39 PM, 24th October 2016
About 2 years ago

Hi Desi,

I'm also a contractor and I've just set up a property SPV. The new company took me about 15min to create at Companies House. I structured mine as a separate company and then drew up an intercompany loan agreement (templates can be googled) and transferred retained funds from my contracting company to my SPV in order to invest them in property - as corporation tax has already been paid, there's no further tax applicable. There's also some division on the internet as to whether your trading company and the SPV become "associated companies" and you lose the right to be in the Flat Rate Scheme - I would argue no, as the conditions are that there is an organisational link (true) financial link (true) AND economic link (false) - the definition of economic link if you drill into it is that one company benefits from the actions of the other. Basically the rule was set up to stop someone splitting a large company into 2 related companies to still access the FRS, and in this case the companies are separate and the SPV isn't even VAT-applicable.

I'm single so not an expert on marital tax breaks, but given that each individual gets £5K tax-free dividends, your other half should be getting £5K from one of your companies to take advantage of this.

If you do set up the new property SPV and then sell your current rental property to it (read up on the capital gains implications though) so long as you and your partner are 50/50 in the shares for that company, then the ownership would be split.

Desi Dragieva

16:37 PM, 24th October 2016
About 2 years ago

Thank you both, this gives me further direction.
Regarding the spouse tax allowance, I received two completely opposite answers. One is that we need to be married in order to use it. The other was that marriage is irrelevant in this case as we are cohabiting. Both advices are from qualified experienced accountants... I tried to find more specific answer in the HMRC web site but still confused ... Has anyone experienced/ come across similar situations or is aware of how HMRC treats this?
D


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