SPV and Holding Company model
Form a Holding company
Form an SPV
Have the HC own the 2 companies including your Consulting Ltd company (A shares)
Restructure the Consulting company to ensure you retain freedom of movement of surplus funds
You could remove the need to have 3 companies and revert to two if you don’t mind a loan agreement between the two entities and have no intention of closing your current company, hence a loan doesn’t matter. This is less legal work, less complication and cost, but ultimately leaves a loan live on the balance sheet of the Consulting company forever (meaning you must always have 2 companies operating)
Existing Limited Company has surplus funds available and wishes to loan this to another company for the purpose of property investment. This can either be on a commercial interest basis of at 0% until repaid.
New Special Purpose vehicle (SPV) formed with funds loaned from the existing Ltd Company. These funds will sit on the balance sheet as a liability and will need to be repaid at some stage to the main Ltd Company.
There are lots of things to consider, and here are a few key points we can think of:
Special Purpose Vehicle (SPV)
Pros and Cons
1. Tax treatment of profits
If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your consulting company) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.
The rate of Corporation Tax is 19% (and falling)
You will still be taxed on the dividends if you take profits out of the company, but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.
2. Tax treatment of mortgage interest
As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (you'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.
3. Opportunities to mitigate inheritance tax
Property held within a company gives more options when it comes to planning for Inheritance Tax. We could in future make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.
So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?
Because of course, there are downsides too…
Why not invest through a limited company?
1. Mortgage availability
This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.
The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction, lenders are following in order to win their business.
You will still need to give a personal guarantee and your own finances will be scrutinized, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a deal breaker than it once was as I know a very good broker.
2. Dividend taxation when you take the money out
If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.
But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a dividend tax on what's left.
So if you want to live off the property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others.
3. Extra cost and hassle
There are additional costs as you will have 2-4 separate Ltd companies as per our discussion.
How to decide if using a limited company is right for you
Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on four factors:
How much income do you have?
If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.
Do you want the property income to live off?
Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.
Do you use mortgages?
The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for any taxpayers.
Who are you buying properties for?
Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance fun in retirement, or is it important that you pass your portfolio on to your children or grandchildren?
If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.
4. Your own loans
If you are able to refinance existing properties that you own, this money could be lent into the Ltd company and then used to buy new parties. When profits are made within the business we state that these will be used to repay loans, then if required you just loan the money back in again and again.
Therefore increasing the portfolio without suffering any ongoing tax along the way.
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