Do you think I should be Ltd?

Hi Stuart and welcome to Property118.

Based on what you have explained, my answer is YES, I do think a limited company structure would be best suited to your business model.

I rarely, if ever, recommend incorporation to landlords who want to buy, hold and rent property as an investment but for short term strategies such as trading, flipping and development there are several advantages.

Don't take my word for it though, I'm not insured to provide tax advice, but this man is >>> http://www.property118.com/member/?id=452
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Check out Carl Bayley's Using a Property Company To Save Tax (Tax Café), which is updated annually. Limited companies offer few advantages if you are a buy-and-hold landlord or if you are speculating on price movements whilst doing very little actual work on the properties, but there are plenty of advantages if you are effectively a small developer. It is also possible to operate a "hybrid" company that has some rental properties but at least 50% of its activities relates to renovation/new-build development.

As regards the property you are just in the process of buying, there is no need for it to be formally transferred to company ownership at the Land Registry. You simply write a letter, witnessed by your solicitor, saying that you are buying the property "on behalf of" the company. The purchase cost is treated as a Director's Loan by you to the company, which can be repaid later when the company has the funds; the property is recorded on the company accounts as an Asset. You can run a Director's Loan to your company for years and even charge it an appropriate rate of interest (declaring the income on your personal tax returns, of course). You then put all the renovation costs and company-admin costs through the business, and hopefully sell at a profit, using the returned capital to buy your next property.

The reason for retaining each property in your own name is that it is far easier to secure (buy-to-let) mortgage loans. It will be next-to-impossible to obtain a mortgage for your company for at least three years, especially since it sounds like most of your income will be paid by the company.

As regards income, don't forget that the company can also pay you a director's salary for your admin time, in addition to your carpentry work. However, it is tax-efficient to keep your taxable income (income tax and NI) as low as possible, and top up your income by paying yourself dividends on your company profits. You will endure 20% corporation tax on your profits before you can pay yourself a dividend - and you must be able to demonstrate you have profits, as far too many small business owners are tempted to keep taking out money from their business when they feel like it, without the profits to justify this - so there's no saving on 20% personal income tax, but at least you won't be paying NI. Of course it does help to pay some NI, to build up your state pension entitlement.

When you set up the company, consider creating two classes of shares: one for Directors and one for investors. You could have 100 Class A shares for directors, and Class B shares issued on a 1 per £1 invested basis. This makes it easier to distinguish between dividends for each class of share, in case in the future someone wants to invest in your company. Development is very capital-intensive, and you may find, as you gain experience, that you really want to gear up and even try new-build, and this will require capital resources that are greater than you have or a bank is prepared to lend.

Reply to the comment left by "Tony Atkins" at "11/11/2014 - 13:07":

Thank You Tony.

Funnily enough, I ordered Carl Bayley's book a few days ago, awaiting delivery, should be a good read!

For the property I am in the process of buying (completion is next week) you advised writing a letter, witnessed by my solicitor that I am purchasing on behalf of a company. Will it matter that the new company won't be set up by then? I have a preferred company name which is currently available.

What would be a ball park cost of setting up such a company, and likely accounting cost each year?

Thanks again

Stuart

Reply to the comment left by "Edie May" at "11/11/2014 - 21:29":

Hi Eddie

My accountant offers same day service for company formations, ongoing costs are quoted individually based on the business requirements - see >>> http://www.property118.com/member/?id=452
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Reply to the comment left by "Edie May" at "11/11/2014 - 21:29":

Hi Eddie,

No, it won't matter: you are just engaging in pre-incorporation activities by buying the house. Once the company is set up, book all the purchase costs to the company as part of your initial Director's Loan, and book the house as the company's starting assets, again via a Loan from you.

I've no idea on costs: maybe £250 to set up and £750 for doing the books. It would probably to pay the accountant extra to have ongoing advice, as you are bound to want to ask about things as you go along.

"I believe being a Ltd company will be advantageous in my situation, because I am reinvesting profits and only want a wage for the work I do on the properties"

How about you buy and own the properties as an individual. But you give all the doing up work / management to your own LTD Company who invoice you every month. The Ltd Company pays you a monthly wage for this.

As far as I know (and I'm not an expert) a Ltd Co selling property that has increased in value will pay more tax than an individual as it has no cgt exemption.

From my understanding (having read Carl Bayley's book and had some advice from him too), Steve's suggestion that a Ltd company selling a property that has increased in value will pay more tax than an individual is definitely wrong. If you are classed by HMRC as a developer, ie buy, refurb, sell, and you do so as an individual, then you pay tax on the profit of the sale. As in, you pay income tax, not CGT. And you also have to pay national insurance too. So you may be paying 50-60% tax on the profit from the sale. That is why, if you are buying, refurbing and selling, then it can make sense to do it via a ltd company and pay 20% corp tax. But it also depends on whether you want to take the profits out of the company, what if any other employment you have, and hoe you are financing. Definitely recommend the book (and the advice I received!). The book even has tables showing the break even point for various situations and profit levels whether it is best as individual v. Ltd company.

Reply to the comment left by "Steve Gracey" at "17/11/2014 - 13:39":

Steve - I agree with Vanessa. I'm no expert either, but I've read Carl Bayley's book carefully and the case for putting development work through a company is clear-cut.

You will always pay more tax if you rent or develop property on a personal basis, because as Vanessa says, you will have to pay tax at income tax and NI rates on your profits. So if you make £100,000 annual profit on top of a salary, you will be paying 40% and 45% income tax on most of this profit, plus NI.

Compare this with paying 20% corporation tax through a company and there is no comparison. Limited companies don't pay CGT: only individuals do, or self-employed sole traders or partnerships. See https://www.gov.uk/capital-gains-tax-businesses/what-you-pay-it-on.

It is far more tax-efficient for individuals doing renovation or new-build to go through a limited company. It is also possible to hold rental property within a development company, provided it does not take up over 50% of the turnover and you can clearly demonstrate you are "trading" rather than "investing". There can be a saving here too when you come to sell a rental property, because the company only pays corporation tax, whereas politicians keep fiddling around with personal CGT rates and bands.

Thanks for the comments. I've now read Carl Bayleys book and its reassuring that the comments on here tie in with my own understanding of the situation.
Its time to get it all set up now!

Reply to the comment left by "Tony Atkins" at "13/11/2014 - 15:12":

Setting up a limited company costs around £35. Get quotes first, accountants charge a fortune