Feedback and advice on moving properties to a LTD company

[Robin Doran]

All,

 

I'm looking for some feedback and advice on my proposal to move property into an established property LTD company that I set up in 2013 for student pods.  Although I will incur CGT and SDLT obligations I expect to manage that through separate capital losses and remortgaging.    I would be withdrawing money from the company but that would be via the Directors Loan account which covers the debt the company owes me.  
I'm looking to transfer as I'm a higher rate tax payer looking to be more tax efficient by shifting from income tax to corporation tax.  I've provided accurate figures where possible but have had to make some assumptions, hopefully its clear which is which.

LTD company
Set up as a property company late 2013, its current assets are two student pods worth around £110k and debts owed to me of around £90k in the form of a Directors Loan account.
The Directors Loan account is used to withdraw money from the company without incurring income tax.  No Dividends or salaries have been paid so far.  The gross income per year is around £8k, after transferring the properties the gross income will be around £33k.  I have a small emergency fund of £2k in the business account which can cover all properties while I build up a larger fund from income.

Personal Property
I have two properties that I own outright with no mortgages. I lived in both as my main residence before renting and since they went on the market there have been no void periods.  The current valuations are based on Zoopla.  I've incurred major redecoration and operational expenditure in the last three years which kept my income tax bill down but the properties have no substantial work planned for the next 3 years minimum .

Property1
Current value:  £240k

Current rental income:  £11.5k

Rental start date:  2012-01
CGT obligation:  5 years
SDLT obligation:  £9.5K

 

Property2
Current value: £287k

Current rental income: £12k

Rental start date:  2013-08

CGT obligation:  3 years 6 months
SDLT obligation: £13k

 

CGT Obligation

this is my personal responsibility but I have a CGT loss of £120k that I'm carrying over from a failed business venture which increases to £131k if you include the yearly allowance.  I want to use this up to soak up as much of the CGT obligation as possible.  This might include transferring one property in 2016/17 and one in 2017/18/ to use two years CGT allowance.

SDLT Obligation
This is the responsibility of the the LTD so I would look to cover this by taking a BTL mortgage on the properties and paying directly to HRMC

 

Directors Loan Account
By transferring the properties to the business I expect the Directors Loan account to increase by £527k to around £615k.   I would like to payback around 2/3  part of the Directors Loan by mortgaging the properties and withdrawing the funds,  if that is not feasible I would draw down on the Directors Loan each year up to a limit based on the amount of net profit earned for the same period.

Transfer expenses
All costs of transfer should be claimable expenses by the LTD or me.
The main costs should e covered by the LTD company but any personal expenses to be covered by taking money out of the company.
I expect costs to include a solicitor and an accountant,  I'm estimating around £1k in total because the transfer and tax calculations should be simple but understand it could be more.

Corporation tax

I expect to pay 20% corporation tax on net income of around £25k, so £5k PA.  £25k covers income from 2 properties and 2 student pods.  
If I don't transfer the properties I expect to pay 40% income tax on £18k net income from personal property and 20% corporation tax on  £7k  net income from the ltd, that's £8.4k total tax a year.
Year on year I should be saving £3.4k tax per year by shifting from income tax to corporation tax.

BTL Mortgage 
I would like to mortgage both properties to gain extra capital to:

1) Cover the SDLT bill
2) Pay back some of the Directors Loan, this can cover any additional personal CGT above £130k 
3) Increase property portfolio.
BTL Mortgage would be interest only and eligible for mortgage tax relief within the LTD.

Questions?

• How do I calculate the valuation of my property at the start of rental and as of todays date that is sufficient for HMRC?
• Are there any restrictions on withdrawing cash from the Directors Loan account with  newly mortgaged funds?
• When do CGT and SDLT payments have to be made, is this an end of tax year payment or immediate?
• Do you have any other other suggestions or feedback on the proposal and what I may have missed or misunderstood?

 

I hope this is also useful to others who might be in my situation and I'm happy to answer any question others may have.


 

[Robin Doran]

Short update:  

 

i spent an enjoyable couple of hours* going through HMRCs guides on Private Residence Relief and Letting Relief which answers my questions about personal  CGT Obligations for selling a home that has been rented for part of its ownership.

It doesn't look to be as bad as I'd expected but the rules on calculating Letting Relief are complicated,  based on my figures I calculated  I would owe nothing on the Property1 and around £13k on Property2.

That does seem low so I'll need professional assistance to calculate figures.

If anyone is interested,  Private Residence Relief is based on the difference between purchase value and sale value as a percentage of the time the property as a primary dwelling with a little extra time given to cover selling properties,  Letting relief is determined based on the lower of three values, a fixed £40k,  the relief as a residence or the gain through letting.   I'm not going to pretend that last statement made sense, the link provides far better examples.



*not really.

[Tim Forber]

Hi Robin Doran,

 

Thank you for all of this info. I find it fascinating. I am currently in the process of moving out of my home into another purchased property and I intend on setting up a ltd co for future purchases.

 

I have a couple of questions. You haven't mentioned the equity in your two personal properties. Is this more than enough to cover the SDLT etc once you re-mortgage with the LTD?

 

Also, you mentioned that the Director's loan will increase once you sell the properties to the LTD. Why is that? I cannot see where this increase is coming from?

 

I think I will be following this exact method in a couple of years time. The only restriction stopping me doing it now is that a LTD company cannot get a mortgage on a house that was "recently" lived in by one of the directors (I was advised that it just isn't possible).

 

Looking forward to more updates.