Purchase of investment property tax efficiently - USERNAME: Casio

Tax Question:

PURCHASE OF INVESTMENT PROPERTY

I am looking to purchase investment property @ £150k.

I only have 50% the funds to acquire the property.

I therefore have two options:

1. To borrow the remaining 50% of the funds required from my Ltd company (in which I own 100% shares) and then pay interest to the company at the beneficial rate of interest to avoid any benefit --in-kind issue. I do not wish to find external finance, e.g. bank.

Or

2. To purchase the property jointly with my company (50:50).

(a) Can you please advise on the above two options.

(b) Can you please suggest any other alternative

(c) Can you please consider tax implications of (a) and (b) and suggest which alternative may be better from tax perspective.

Answer:

The problem with borrowing funds from the company would be that there would be a 25% tax charge on the loan payable by the company. Paying a market interest rate would avoid any benefit in kind on you but would not prevent a tax charge in the company.

If you extracted the funds from the company this would also trigger a tax charge.

Therefore if you wanted to avoid an immediate tax charge you'd need to use the UK company to purchase. You could either purchase jointly with the company or lend funds to the company and have the property purchased in the company name.

If you didn't want to purchase in that company you could form a newco, inject your cash as a loan to the company and have an intercompany loan from the existing company. The newco could then purchase the property.

Using a company can be attractive particularly given the company will obtain indexation relief and the top rate of corporation tax is below the higher rate of CGT (ie 26% vs 28%). If you've funded the company with a loan, this can be extracted free of tax in the future. Any excess proceeds would be subject to UK income tax unless you could extract within your basic rate band or as a non resident. You could also look at selling the shares in the company personally to crystallise a CGT charge on you rather than in the company.

It's worth bearing in mind that if you did use a company there would be no PPR relief if you occupied it as a main residence (and there would also be a benefit in kind taxable in you).

It would depend on your specific intentions in relation to the property but using a company could be a good option -- particularly where cash will be retained within the company.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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