The Lemon Fool

Hello!

I am looking at investing around 100K. One option would be to invest in stocks and shares via a dealing account, as I have already used my pension and ISA allowances. The second option would be to invest in UK property and this I think would be best done via a SPV limited company and without resorting to a mortgage. The aim would be to rent the property and leave the rent income within the company, with the intent to reinvest it to build a portfolio that could become an important source of passive income once I retire.

I would like to know whether anybody has already set-up a SPV/Limited Company with that intent ? Also, I would like to hear your thoughts on the current housing market ? Would investing in a property be a good idea in current times?

Thanks in advance
Lm

Why do you think it’s best done via a company wrapper? For an investment of only £100k I would have thought the costs of establishing and running the company would make it ineconomic.

Personally I wouldn’t touch UK residential property with a barge pole as an investment.

I guess what is appealing is that the income from the rent would be liable to corporation tax and as I would not plan to use the money I could let the profits roll up within the company to buy the next property.

Could you please share why you don't see Uk residential property as a good investment?

thank you!
Lm

Lemoe wrote:I guess what is appealing is that the income from the rent would be liable to corporation tax and as I would not plan to use the money I could let the profits roll up within the company to buy the next property.

Could you please share why you don't see Uk residential property as a good investment?

thank you!
Lm

In that case you should borrow against the property. Interest is deductible against income for corporation tax purposes.

Just because it’s at all time highs (subject to a few regional variations), we’re going into a recession and the deluge of sales from BTL goons just waking up to the tax changes (removal of tax relief on mortgages) is just starting.

Spet0789 wrote:

Lemoe wrote:I guess what is appealing is that the income from the rent would be liable to corporation tax and as I would not plan to use the money I could let the profits roll up within the company to buy the next property.

Could you please share why you don't see Uk residential property as a good investment?

thank you!
Lm

In that case you should borrow against the property. Interest is deductible against income for corporation tax purposes.

Just because it’s at all time highs (subject to a few regional variations), we’re going into a recession and the deluge of sales from BTL goons just waking up to the tax changes (removal of tax relief on mortgages) is just starting.

Not a removal but a restriction (to basic rate in effect).

If Brexit turns out badly and we end up in a high inflation economy (as one possibility amongst many, I hasten to add) bricks and mortar could be the very thing.

I tend to avoid myself but that is because my salary comes from the property industry (my employers are a property investment group) and the maxim re all eggs in one basket springs to mind, I mainly prefer investment trusts invested in overseas markets though do hold one UK investment trust invested in UK property (but it is commercial property, not residential, and has low exposure to retail)

Waking up this thread again, I've just sold the (no longer needed) big family home in Reading.

The buyers used their Ltd Co to buy it, and I'm wondering why. Does it still make sense to do this to avoid SDLT liability on future sale of the house? ISTR selling the shares in the LtdCo which owns a house did not attract SDLT like a direct sale back in the day, but I thought that had been stopped a few budgets ago.

Does anyone here know the current position regarding avoiding SDLT by using a LtdCo, or any advangage at all in buying with a LtdCo? I ask because I'm thinking of buying another house and now SDLT is nosebleedingly expensive nowadays, this might turn out to be a cute move for the future.

Mike4 wrote: any advangage at all in buying with a LtdCo?

It's always had the advantage that the legal process of buying a Company is much quicker than buying land and property. For individuals the loss of CGT relief meant that route was never popular. Perhaps it might work for a second home if the annual paperwork of running a limited company wasn't a serious problem.

Could it be that your buyer had a personal service company which had accumulated a lot of wealth? To get the wealth out of the limited company would have involved either paying a dividend or a return of capital, either of which may have incurred tax.

Alaric wrote:
It's always had the advantage that the legal process of buying a Company is much quicker than buying land and property. For individuals the loss of CGT relief meant that route was never popular. Perhaps it might work for a second home if the annual paperwork of running a limited company wasn't a serious problem.

Could it be that your buyer had a personal service company which had accumulated a lot of wealth? To get the wealth out of the limited company would have involved either paying a dividend or a return of capital, either of which may have incurred tax.

Ah yes CGT, that's why it isn't normally done. Thanks. I'm being slow aren't I?

This couple have been weird in their behaviour right from the start. They are buying it (have bought it) with a BTL mortgage as they plan to re-model the place before moving in and selling their other house so couldn't get a resi mortgage. Given they needed to max out their borrowing it seems odd they should use a ltd Co as the vehicle. I can't really figure out if they are being incredibly sharp or a bit dopey, hence my question! I was wondering if I am missing something and ought to buy my next house with a Ltd Co. Probably not given I'll miss out on CGT relief assuming I have to sell it at some point to fund my nursing home fees.....

Thanks for your reply.

Mike4 wrote: They are buying it (have bought it) with a BTL mortgage as they plan to re-model the place before moving in and selling their other house so couldn't get a resi mortgage.

One recent reform was that it was no longer possible to claim tax relief on interest costs if a buy to let was held in an individual's name. On the other hand, this reform didn't disallow the normal practice whereby a Company can offset cost of borrowing against income before determining taxable profits.

Alaric wrote:One recent reform was that it was no longer possible to claim tax relief on interest costs if a buy to let was held in an individual's name. On the other hand, this reform didn't disallow the normal practice whereby a Company can offset cost of borrowing against income before determining taxable profits.

Is that really the case? I was under the impression tax relief was limited to basic rate, rather than not allowed at all. A brief google suggests this is correct, e.g. according to this page here: https://www.gov.uk/government/news/chan ... -landlords

Or am I misunderstanding something very basic?

Spet0789 wrote:In that case you should borrow against the property. Interest is deductible against income for corporation tax purposes.

Just because it’s at all time highs (subject to a few regional variations), we’re going into a recession and the deluge of sales from BTL goons just waking up to the tax changes (removal of tax relief on mortgages) is just starting.

This simply doesn't make sense: you expect the OP's venture to be loss making but encourage him to borrow? That simply increases the costs and/or magnifies any losses. Surely better to continue as he proposes and swallow any loss out of his equity?


GS

Mike4 wrote:

Alaric wrote:One recent reform was that it was no longer possible to claim tax relief on interest costs if a buy to let was held in an individual's name. On the other hand, this reform didn't disallow the normal practice whereby a Company can offset cost of borrowing against income before determining taxable profits.

Is that really the case? I was under the impression tax relief was limited to basic rate, rather than not allowed at all. A brief google suggests this is correct, e.g. according to this page here: https://www.gov.uk/government/news/chan ... -landlords

Or am I misunderstanding something very basic?

No, your understanding is sound.

When fully implemented in 2020/21 tax year, you will calculate your taxable profits without deducting any interest costs. However, in calculating your tax liability for the year you will get a tax credit equal to your interest costs multiplied by the basic rate of income tax. Currently, this change is being phased in and for 2018/19, 50% of interest costs can be deducted when calculating taxable profit with the remaining 50% generating a tax credit. In 2017/18, when the change started, it was 75% for the taxable profit calculation and 25% for the tax credit. For the current year (2019/20) it will 25% deductible in the calculation of taxable profit and 75% for tax credit. For 2020/21 and subsequently it will be 0% deductible and 100% for the tax credit.

The change only affects landlords with borrowings and will hit highly leveraged landlords hardest. Higher rate taxpayers with borrowings will be worse off under the change. Basic rate taxpayers may also end up paying more as the changes increase taxable income. If the increase tips such a landlord into higher rate taxation there will be more tax to pay. Only landlords who remain in the basic rate band end up without an increase in tax payable.

GoSeigen wrote:

Spet0789 wrote:In that case you should borrow against the property. Interest is deductible against income for corporation tax purposes.

Just because it’s at all time highs (subject to a few regional variations), we’re going into a recession and the deluge of sales from BTL goons just waking up to the tax changes (removal of tax relief on mortgages) is just starting.

This simply doesn't make sense: you expect the OP's venture to be loss making but encourage him to borrow? That simply increases the costs and/or magnifies any losses. Surely better to continue as he proposes and swallow any loss out of his equity?


GS

I see your point but I don’t agree.

It’s so cheap to borrow against investment property that in my view you always should. Especially so in a corporate wrapper due to the tax benefit. So there are only two sensible states to be as a property investor: (moderately) levered long or flat.

My advice (I think I was crystal clear) as a property market sage was not to buy at all. But I am no sage and possess no special insight.

But if the OP chooses to buy, he has obviously decided to ignore my advice. That being the case he should borrow, in my view. By analogy, bungee jumping’s not my thing, but if you’re going to do it, do it in some massive canyon in New Zealand or the Andes. Don’t do it at the local leisure centre.

As an aside, this leverage logic applies to investment property. I see the value in owning your own home outright.