Rent charged by the director

LynWest

Hi hope everyones Monday are going as planned.

I have a client who is the sole director of a limited company. They have charged the company rent as she owns the property. I was fine with that but asked a fellow accountant about the self assessment, asking whether the income from this needs to be shown in the property income section of the SA return. He advised that it doens't need to be reported on. Surely that isn't right, because if someone else own the property and charged rent to the company they would have to report the income!!? If anyone could just confirm for me then that would be much appreciated.
Also would someone please kindly tell me the tax advantage of charging your company rent. I know that it reduces the corporation tax bill but then you would end up paying personal tax on the money anyway!?

Many thanks

burg

This is normally the case for 'use of home'. You work out the 'rental charge' based on the costs of running the business from home. You then charge a similar fee to the company as rent.

On the personal return it is then a question of income of X less expenses of X gives a small profit or no profit / no loss.

Therefore tax advantage is the value of the charge to limited company x CT rate.

Yes I always declare on the personal return.

LynWest

Thanks Ian, my gut said it should be declared. I feel much reassured, many thanks

Monsoon

Another vote for definitely declaring it, yes. And have a contract between the director and the company to make it watertight (include things like non exclusive use of the room etc).

qwerty

Is this a commercial property or part use of residential property?

Either way it needs reporting, but when it is commercial property, I always advise clients that charging rent will mean they cannot claim (or will have a reduced claim) for entrepreneurs relief when the property is sold on cessation of the business. I also put this in writing too so that they cannot come back to me in X years time and say are paying more capital gains tax because they were advised incorrectly.

I also always state that this is based on current tax rules, and that they could change between now and the time they dispose of the asset.

With regards to your question about why charge rent, it can be for a number of reasons, e.g. the company has insufficient reserves to pay dividends, and charging rent incurs no national insurance, unlike salaries. The owners can therefore legally withdraw funds from the company with a lower overall tax liability. It may also be a condition of funding. I have seen one lender who wanted a commercial lease put in place between the director and his company which charged rent at a commercial rate.

deanshepherd

Definitely declare as rental income on personal tax return.

Regarding qwerty's point above on entrepreneurs relief..

Every case I have looked at has the client much better off claiming a rent deduction and the 20% CT relief that gives over x many years rather than the pitiful relief on property given by ER. Who makes a gain on commercial properties these days anyway? You must have owned the property a long time and that is a lot of rent relief gone begging in the meantime.

LynWest

Thank you all for a very comprehensive answer. That is fantastic. The property is a residential property but she works from home so uses a room as her office. I will advise her about the contract between the company and the director, hadn't thought about that. She used to be a lawyer so don't think she should have any problems with that. Thanks Monsoon and thanks to Qwerty and Dean i now get the advantage of charging the rent!

qwerty

We do look at each case on an client-by-client basis, and do calculations based on rent being paid or not, together with the benefits and drawbacks of each. We then ask the client how they would like to proceed.

Also, anything can happen with capital gains (and property prices for that matter), and I have know some clients who have made huge gains on commercial property (although, as Dean pointed out, they had held it for a long time).

My personal view is to give the client all the information, even though it may not be beneficial for them now, as then they have been informed of their options and hopefully will not come back with a "you didn't tell me this".

In fact, this recently came up with a new client. They purchased a property in 2009, rented it (at market value) to their company and sold the business and the property this year. They made a nice gain on the property due to the surrounding area being significantly improved and were rather upset that they have to pay 28% capital gains tax instead of 10%.

LynWest

Thanks Qwerty if they have all the info, then they make an informed choice, well worth remembering.