Accounting for Limited Company Property Investments

It can be a complex decision for clients when it comes to determining how best to utilise existing Contractor Limited Company funds in a Property Investment Company as the options are numerous and may also require both legal and mortgage broker advice.

This is because it depends on other factors in addition to just taxation, such as:

• Lifestyle choices and whether you will still need to use the contractor company now or in the future?
• Whether it will be a loan or a permanent transfer of funds?
• A structure that mortgage brokers are willing to lend to?
• The forecast size of the companies both currently and in the future (as the reporting requirements and treatments are different for micro, small, medium, and large sized companies)?

Where you no longer plan to use the contractor company then the options include:

• Use your existing contractor company for Property Investment – You can change the nature of trade (SIC Code) at Companies House and invest in property directly using this company.  Keep in mind though that a property investment company is not a TRADE and therefore you would potentially lose the option of Entrepreneur’s Relief on any funds held in this original contractor company at the point of wind-up if you opt for this treatment.  (This is normally only relevant though in instances where cash reserves exceed £25k and you want to use a Members Voluntary Liquidation in order to apply for Entrepreneur’s Relief.)
• Wind-up the existing contractor company – Then use the funds after liquidation to invest privately into the property company via a personal loan or shares.  A loan is normally more tax efficient as you can then withdraw these funds tax free in the future, and charge the company interest for the period of the loan to withdraw additional funds (subject to self-assessment taxation). This is an attractive option if Entrepreneur’s Relief is available, and is considered favourably by mortgage brokers.

Where you want to continue contracting, then you then need to decide whether you want to temporarily loan the money from the Contractor Company or permanently transfer the funds?

This decision will depend on:

• How long you plan to contract in the future, as a loan may need to be repaid in the future at the point you decide to wind-up the Contractor Company?
• Whether it will be possible for the Property Company to repay the funds in the future (as it may still be tied up in property)?

It is certainly possible to loan money directly from one limited company to another providing that the company making the loan has sufficient funds for the period of the loan and it is done at arm’s length, ensuring that a loan agreement is in place, and a commercial rate of interest is charged.

The fact that interest is charged is normally tax neutral though as it will normally be treated as taxable income in the company making the loan and taxable expense in the company receiving it. Again the viability of this structure depends on whether or not the borrowing company will be able to repay the loan in the future (as it may be tied up in property), and whether you plan to continue to use the original contractor company. This structure is also viewed less favourably by mortgage brokers.

Where a loan is not suitable and you are interested in transferring the funds permanently then options include:

• Extracting dividends / salary / bonus from the Contractor Company – Dividends are normally the most tax efficient of these options.  You can then invest privately into the property company via a personal loan or shares (per above a loan is normally more tax efficient).
• You can also consider user more complex group structures, each of which have advantages and disadvantages.  This is not a service we can provide internally but we do have Corporate Lawyer contacts that could assist you if you wish to consider this option?  Examples include:
  • Setup the Property Company as a parent of the Contractor Company – This would allow dividends to be voted to the parent company which would normally not be subject to additional taxation.  A potential disadvantage of this structure is that mortgage lenders may be reluctant to lend directly to a Holding Company.
  • Setup the Property Company as a subsidiary of the Contractor Company – This would allow the Contractor Company to loan funds to the property company on more favourable terms.  Potential disadvantages include: the ability of the Property Company to repay the loan, the availability of mortgage finance, and the fact that the assets are less secure in a subsidiary from potential future challenge by HMRC.
  • Setup a Holding Company which wholly owns both the Property Company and the Contractor Company. This will then allow you to either:
    • Charge a Management Charge from the Holding Company to the Contractor Company.  This option is normally tax neutral as the income will be chargeable to Corporation Tax in the Holding company, but allowable as an expense in the Contractor Company.  Then lend the funds from the Holding Company to the Property Company.
    • Vote dividends to the parent company (per above).  Then lend the funds from the Holding Company to the Property Company.

To learn more about our property investment accountancy packages, which start at just £40 a month for Private Property Investment and £60 a month for Limited Company Property Investment please request a call-back.