Self-employed contractor looking to invest via another Ltd Company/SPV

[goslingl12]

Hi guys I'm a contractor and receive my salary through my Personal Ltd Company. I'm looking to purchase a buy to let via a separate Property Ltd Company/SPV. 

 

I'm looking for advice on the most tax efficient (i.e. minimising dividend tax) way to transfer funds for the deposit from my Personal Ltd Company to the Property Ltd Company/SPV? 

 

I'm going to discuss with accountant but would appreciate some background knowledge beforehand. I've seen various suggestions centering around making a loan between the two companies...

[James A]

I am doing this at the moment. As far as I understand you cannot give money from one company to another, only lend it. The loan will have to have an interest on it and would ventilation have to be paid back to the first company. You'll have to pay tax on it at some point when you eventually pay the money to yourself but it will allow you to make use of it in your property company until a more tax efficient time in the future (e.g. Retirement).

[goslingl12]

Thanks James this is very helpful stuff. Are you using an accountant to advise on and carry out this process? Regarding the tax payable, is this calculated at the dividend tax rate? And for the loan- did you need to draft a loan agreement to formalise this?

 

Thanks in advance!

[Raju Gajurel]

As suggested by James, the most tax efficient way is lending money from one company to another company. But, for HMRC to accept this, the company should charge a commercial interest rate. You should have at least some sort of loan agreement to show to HMRC if there is an enquiry from HMRC. The loan can be repaid similar as any other bank loans.

 

Suppose, you contractor company lends £20,000 at an interest rate of 4% and with terms of 10 years. New SPV will repay the loan to the contractor company over 10 years and pay interest on the loan. In this way, you don't need to take out the money as a dividend.

 

This is just general guidance - as each situation is different and so you should consult with your accountant/tax advisor.

 

 

[goslingl12]

Thanks Raju, also v.helpful advice. Yes the next step for me is to sit down with an accountant and go through due formal process. I wanted to be fairly well informed before doing so, so this has been useful input!

[James A]

To add to Raju's comments. I have been told to set interest 3% above base (3.5%) and I don't think you need to limit the term to the loan so could lend it indefinitely paying interest until you want to pay it back.

 

Company will also have to pay corp tax in the income of the loan (the interest) but Company 2 will be able deduct it for its corp tax.

Of course you will still need to pay income or dividend tax on it if the money ever goes from one of the companies to you but hopefully by then you'll be able to make use of other tax allowances when winding up the company and you get to put it to work in the meantime.