Guide curated by specialist Property Accountants on buying buy to let property tax efficiently
With the price of the property on the rise, the home of your dreams might seem out of your reach. But perhaps it’s achievable with a tax-efficient contribution from your company and some tax-saving tips from your property accountants.
Company-provided accommodation
If you want to move home but can’t quite afford the asking price for the new “des res”, one option would be to get your company to buy it, assuming it has the resources. It can then let you live in it, but there will be a huge benefit in kind (BiK) tax charge for you and an NI charge for your company.
When it comes to selling the property, capital gains tax will be taxed on any gain it makes, whereas if you had owned it, capital gains tax private residence relief would mean that any gain would be tax-free.
The first alternative – is a loan
An alternative would be for the company to make a low or interest-free loan to you to buy the house. This arrangement would also be a taxable BiK. For example, a £75,000 loan would result in a taxable BiK for each tax year the loan was outstanding. However, of course, if you repay any of the loans, the tax charge reduces in proportion. The company would also have to pay NI at 13.8% of the amount of the BiK. And that’s not the end of the story; the company would have a corporation tax (CT) bill linked to the loan. It is always advisable to speak to an accountant who understands your specific situation before making any tax planning decisions.
Temporary tax cost
If your company lends money to you, it will have to pay a one-off CT payment equal to 32.5% of the loan (or 25% if the loan was made before 6th April 2016). So, in our example of a loan of £75,000, that would be £24,375. The good news is that you can make a claim to have this tax refunded following the end of the accounting year in which the loan is repaid. There are different procedures for claiming if you claim before or after 2 years. Speak to your property accountant or accounting firm to find out how you can claim the tax back.
The second alternative – is joint ownership
Alternatively, your company could buy a share in the house. There’s nothing HMRC can do to stop you and your company from jointly owning a property for a potential tax saving. The joint purchase should be made as tenants in common. This means that each owner has an identifiable share of the property value, e.g. 70%/30%. But importantly, as a tenant in common, you’ll have the right to use 100% of the property 100% of the time, even if you own only a small share of it without any major consequences. If the property you purchase is let out, you will need to make sure the tax liabilities are split correctly as per the ownership and a self-assessment for each individual is submitted as required by HMRC.
Related: Read our comprehensive guide to Self-Assessment to learn more about how it works.
Tenant in common issues?
It’s been suggested that where a company co-owns a property with one of its directors, their right to occupy it is entirely down to their interest as a tenant in common. If that’s correct, it would stop HMRC from being able to make the type of tax charge mentioned in the first paragraph above. Unfortunately, this is a tricky argument and we think HMRC would probably win. But there can still be a tax advantage. Again we are not advising or recommending anything and recommend you to speak to your accountant before making any decisions.
“Tip: Keep the company’s share of the property below £75,000. At this level the taxable BiK will usually be around 3% to 4% of this amount, i.e. £2,250 to £3,000. That’s around £1,000 less than if the company just lent you the money. And unlike a loan, there’s no one-off 32.5% tax charge for the company.“
Trap. The company will be liable to tax on a proportion of any gain made when the property is sold.
Clear House Accountants are specialist Agency Accountants in London who have trained their in-house Property Accountants to be able to add maximum value to their ‘buy-to-let’ property clients by providing smart tax and accounting solutions.
