"Man in the Pub" Advice

T.C.
T.C. Registered, Tutor Posts: 1,448
A man in the pub has told his landlord (my client) to go limited to avoid paying any tax! He is considering this, but he has a very large mortgage in his own name and a large bank overdraft in his name. Is it even possible? Opinions appreciated.

Comments

  • jamesm96
    jamesm96 Registered Posts: 523
    T.C. wrote: »
    A man in the pub has told his landlord (my client) to go limited to avoid paying any tax! He is considering this, but he has a very large mortgage in his own name and a large bank overdraft in his name. Is it even possible? Opinions appreciated.

    Ahhh the MDTP (see Monsoon's article in the latest AAT mag!)

    I'm not sure why you'd bother running a rental business through a limited company; he'll pay the same rate of tax as he would have personally (the basic rate of income tax is 20% and the current corporation tax rate on small companies is also 20%) so no saving there, and you don't pay NI on rental income either, so there's no saving to be had their either.

    The man down the pub just doesn't understand the advice he's presumably been given by his accountant - he still pays tax, it's just that he pays it through the company rather than personally! The benefits to being LTD are that you need not pay NI on your profits or drawings, and if you're drawing more than £42,475 out of the LTD company then you'll only pay an effective rate of 25% on anything extra that you draw, compared with 40% if you were a sole trader.
  • stevo5678
    stevo5678 Registered Posts: 325
    I agree with James, I see no real beneifit to going Ltd in this instance.

    Never pay attention from a man in the pub...Unless he is of course an accountant!
  • jamesm96
    jamesm96 Registered Posts: 523
    stevo5678 wrote: »
    Never pay attention from a man in the pub...Unless he is of course an accountant!

    They never are! ;)

    Mike.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    jamesm96 wrote: »
    They never are! ;)

    Mike.

    Sometimes they are. ;)
    I once picked up a client from being in a pub "Does anyone know an accountant?" !!:lol:

    Also, are there issues with the property being held in the sole name - I believe there are provisions for not diverting the income from that through a Ltd? It's land and property income and has separate rules. I might be misremembering.
  • T.C.
    T.C. Registered, Tutor Posts: 1,448
    Glad everyone agrees with my thoughts. Thank you everyone!
  • jamesm96
    jamesm96 Registered Posts: 523
    Monsoon wrote: »
    are there issues with the property being held in the sole name - I believe there are provisions for not diverting the income from that through a Ltd? It's land and property income and has separate rules. I might be misremembering.

    Hadn't even thought of that!

    I guess if you leased the building to the LTD co (at break-even) it'd work, but that's purely theoretical as it'd be prohibitively complicated! So the LTD would have to buy the building (and suffer stamp duty and solicitors fees).
  • stevo5678
    stevo5678 Registered Posts: 325
    An individual can keep the property in his/her name and charge rent to a LTD Co. The tax effect would be fairly neutral IE allowable in the co and chargeable for the individual. Interest can be charged to the company aswell in certain situations but the co would need to pay quarterly tax deductions withheld from the individual.
  • Dean
    Dean Registered Posts: 646
    T.C. wrote: »
    ...go limited to avoid paying any tax!

    Agree with James and Steve and to take it a step further isn't there actually a double tax charge?

    Client puts property into company = disposal - CGT charge?
    Company pays 20% on IT
    Company sells property; company pays 20% CGT
    Company has large cash pot and client wants it - how does he get it out? Sell shares = disposal - CGT charge?!

    Regards

    Dean

    p.s. Lets not mention the fact that he'll then loose his CGT personal allowance and depending on gain might actually pay tax at 18% instead of 20%!
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    You wouldn't do it that way. You would set up a property management company, have that company collect the rent and deal with maintenance issues in return for a fee. Quite often that fee will be more or less the rental profit. Hence transferring income subject to IT into CT.

    As Mike points out, not much point for most people as there is no NIC on rental income but if client is already a higher rate taxpayer and wants to divert income to spouse or others or just defer taking that income then it is a viable option. Especially if there is a mortgage and you don't want to mess around with names on that or the title deeds.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Does anyone know of any mechanism whereby a person can own a property personally, but put all income through a Limited Company?

    I'm sure I've read that there will be a deemed grant of lease and thus a CGT charge on the individual.
  • stevo5678
    stevo5678 Registered Posts: 325
    100% seen it done with a client in our office for years (and all the refurbishments have gone through the company despite it being in his own name).

    Said client was investigated by HMRC in the past and this was not brought up as an issue.

    There is full disclosue in the Ltd Co via related party trans.

    Not sure about the CGT issues but this will surely be a consideration...

    Another one has put the property into the Co but he pays the finance and re-charges the co who withhold quartely tax (again all done with full disclosure).
  • deanshepherd
    deanshepherd Registered Posts: 1,809
    Monsoon wrote: »
    Does anyone know of any mechanism whereby a person can own a property personally, but put all income through a Limited Company?

    Is it income you want to transfer or profits?

    Shifting profits can be done easily and legitimately (as in my example above). Shifting income (as in the example below) is probably going to be a tax and legal mess.
    stevo5678 wrote:
    Another one has put the property into the Co but he pays the finance and re-charges the co who withhold quartely tax.

    Interesting. So the director carries on paying the mortgage himself, presumably because the mortgage company are oblivious to this arrangement which is probably in breach of their terms?

    Director then puts a quasi-loan on the companies balance sheet for which they pay him interest and withold tax? Interest payable (on his mortgage) cannot be set against interest receivable from the company so I would be interested to see what his personal tax return looks like.

    'Putting the property into the co' is a sale. CGT problems, SDLT problems, Conveyancing problems, Mortgage problems.
    stevo5678 wrote:
    Said client was investigated by HMRC in the past and this was not brought up as an issue.

    I would want a better legal defence than that when I get sued by my client.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Thank you Dean.
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