By Simon Misiewicz
Are you unsure how to structure your property business?
Is the thought of using a limited company a little daunting?
You may wish to mitigate the budget announcement tax implications. Perhaps you saw the article I wrote on the budget announcement and as such you are looking to transfer properties into a limited company.
You could be hit by a Capital Gains Tax (CGT) bill if you are thinking of transferring properties into a limited company that is currently in your own name. However, as another of my articles explains, if you are working full-time in property you may be able to mitigate CGT.
Limited companies are a very useful way to reduce tax if you are trading properties, ie, engaging in buy to sell. The amount of income tax that you pay when flipping houses in your personal name could be as much as 45%, and you will also face additional costs for national insurance. In an earlier article, I explained how you could minimise this by trading properties using a limited company.
The problem — too many limited companies causes mayhem
There are many property investors who are using limited companies in the wrong way. They are mixing up trade activities with investment holding companies. There are also some property investors who have more than three limited companies because they have set up a limited company for each property deal/joint venture.
The issues with having lots of limited companies in the wrong structure can be seen below:
• An administrative nightmare to look after each limited company with receipts and paperwork, something I outlined in a previous article
• Several bookkeeping spreadsheets/online systems
• A wallet/purse full of company cards and always having to make sure you use the correct one
• Multiple bank accounts and bank statmenets
• Additional accountancy costs for the annual accounts
• Filing of several annual returns
• Difficulty with tax planning as you are personally receiving wages/dividends from different sources
Can you relate to the above?
Can you see how things can get really messy?
If you have answered yes to these questions then keep reading for some solutions.
A real life client example — setting up too many companies
For the purpose of this article we are going to name my client John to protect his identity.
John has more than 20 properties, some of which are in his name and some of which belong to his 15 limited companies. John is buying properties but not thinking with the end in mind, so he buys them all in separate limited companies. He is working with different joint venture partners and decides to set up one limited company for each one.
Within his own limited company he is mixing buy to hold properties with buy to sell in the same company.
All in all the 15 limited companies are simply tying him up in knots with paperwork, administration, constant phone calls to his accountant to discuss the year end and filing annual returns. This leaves him with little time for himself and his family or to develop his business. He has now become an administrator and is consequently annoyed and frustrated.
The issue with mixing up buy to hold and buy to sell properties within a limited company can be quite harmful because:
• When you flip there is a degree of risk. Your other properties are at risk if everything goes wrong with that property flip and it creates a significant liability which is greater than the value of the property.
• If you mix up buy to hold and buy to sell then you lose the right to claim entrepreneurs’ relief.
Practical steps you should now take to set up just two limited companies
It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy:
1. Set up a limited company for you that holds property as a long-term investment
2. Set up another limited company if you are looking to buy and sell (flip) properties
3. Agree with joint venture partners that they can have a charge over the property purchased that ensures that they get a percentage of profit and/or a percentage of the uplift in market value. They do not need to be a shareholder of either of your limited companies.
See how easy the above is? You can hopefully now see that there is no need to set up limited companies for each property or each joint venture.
If you are thinking about setting up a limited company to do flips then you may need to consider whether you need to be Construction Industry Scheme (CIS) registered. If you are buying properties to sell and making significant changes to then read this article to work out where you stand on CIS.
Next steps to set up the right structure for your property investments
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.