Taxation of Ltd. Company BTL purchase from loans on private portfolio?

by Readers Question

14:25 PM, 31st May 2017
About A year ago

Taxation of Ltd. Company BTL purchase from loans on private portfolio?

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Taxation of Ltd. Company BTL purchase from loans on private portfolio?

I have the following question regarding taxation of a limited company.

Background:

I hold two residential rental properties in joint ownership with my spouse. Each year I complete a tax return on these.
Last year, I purchased another BTL property off plan which is due to complete towards the end of this year.
Due to the changes in tax treatment of property income (section 24 Finance Act), I took the decision to setup a limited company into which I would place the off-plan property, and all other future BTL properties.
The payment schedule for the off plan was 25% on exchange of contracts (paid), 25% on structural completion (due later this year) and 50% on actual building completion.
The money for exchange of contracts and structural completions was raised by remortgage of the two existing BTL properties.
The Limited Company has now been in place for over a year and I now need to complete my Corporation Tax return.

The Questions:

1. The only transaction the limited company has made is the purchase of 1 property – held in the name of the Ltd company, still in construction. The company has incurred the related costs/expenses in making the purchase.
Is the company considered to be trading or is it dormant?

2. The money raised by refinancing the personally owned BTL properties was used to pay the initial 25% first stage payment, and a further 25% will be used to make 2nd stage payment on structural completion.
What is the most tax efficient way of showing the money on the Ltd companies accounts?
a) Could it be shown as a Director’s Loan – thus ensuring I could take this money back out of the Ltd Co. at a future date tax free (derived from rental income)
b) Is there any mileage in making a loan to the Ltd Co. and charging interest on the loan? e.g. the interest received on the loan would be shown as taxable income on my personal SA return, and the interest incurred by the Ltd Co. would be shown as an expense. Effectively, placing the profit of the company in negative balance, which could be used to offset future profits?

3. How to I treat the interest payments for the outstanding loans for the personally owned properties (and which were used to remortgage and raise funds for the Ltd Co. property purchase). Can I offset 100% of the outstanding mortgage interest payments against personally owned property income (well, now that S.24 is in play – read as add that to my income)? Or can I only offset the balance outstanding prior to remortgage of both personally owned properties – and then use the remaining balance to either a) lend to the Ltd Co. as a Director’s loan, b) make a interest bearing loan to the Ltd Co. – as outlined in question 2.

Thanks and regards,

Paul



Comments

Mark Alexander

14:42 PM, 31st May 2017
About A year ago

The following answers must NOT be considered as advice:-

1) I think the company is dormant but is incurring expenses which will carry forward as trading losses once it is trading.

2) Unless your personal income is taxed at a rate of less than the 19% corporation tax rate (20% last year) I see no logic in charging the company interest on the Directors loans you will make to it.

3) You cannot claim any loan interest at all on any proportion of the loans against your personal BTL properties which exceed their base costs.
.

Dave Driver

11:28 AM, 1st June 2017
About A year ago

I would strongly suggest that you contact an accountant who is an expert in property taxation for this.

Paul Hawkins

12:52 PM, 1st June 2017
About A year ago

Reply to the comment left by "Mark Alexander" at "31/05/2017 - 14:42":

Thanks Mark.

1. I think a all to HMRC (if I can get through on the helpline) or a friendly local accountant would clarify the trading/non-trading status

2. Thanks again, so best way forward would be to let money to the company and show this as a Director's Loan. I can then, once the property is rented, use the income from rent to pay back the director's loan, and withdraw it tax free - if I understand this correctly.

3. Noted.

Peter Hellawell

8:58 AM, 2nd June 2017
About A year ago

Paul I do strongly advise that professional advice is taken and that you do not muddy things by trying to speak to HMRC. As a chartered tax advisor I know from experience that the helpline at HMRC is largely manned by people with limited experience of the real world.
Ps I am retired so would not advise personally as I am no longer up to date.


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