Author: George Ian Hope BAcc(Hons), MSc(IT), FCCA, CGA, CPA
Ian is a general practicing member of the Association of Chartered Certified Accountants with fellowship
status (FCCA). He is also a member of the Certified General Accountants Association of Canada (CGA),
and a member of Chartered Professional Accountants of Canada (CPA).
It can be a complex decision for clients when it comes to determining how best to use existing private or limited company funds in another property 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 source 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 source company then the options include:
- Use your existing source company for Property Investment / Trade – 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 source 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 source 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 trading in the source company, then you then need to decide whether you want to temporarily loan the money from the source company or permanently transfer the funds?
This decision will depend on:
- How long you plan to trade in the future, as a loan may need to be repaid in the future at the point you decide to wind-up the source 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 source 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 Source 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 using 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 Source 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 Source Company – This would allow the source 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 Source Company. This will then allow you to either:
- Charge a Management Charge from the Holding Company to the Source 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 source 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.
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