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BUYING THROUGH A COMPANY: THE PROS AND CONS

It's become quite a trend (and for very good reason). But is it right for you?

The biggest trend that's taken place during my time in property is the huge and sudden shift to people buying properties within companies.

Up until 2015, it was very much a minority choice: there was no compelling need for many people, and mortgages for companies were much less competitive.

But then the changes to the treatment of mortgage interested introduced in the summer 2015 budget happened – which made the company route far more appealing. According to brokers, up to 80% of new mortgage applications are now for limited companies.

It still won't be for everyone, but it's now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let's take a look at the pros and cons…

ARE YOU A TRADER OR AN INVESTOR?

The first important distinction to draw when making this decision is whether you’re a property trader or investor.

If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company.

Why? Because when trading properties as a limited company you will pay corporation tax on your profits – you can find the current rate here. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be a whole lot more (current rates here).

(As an individual you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it, but let’s park that one for now.)

If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

WHY MIGHT INVESTORS WANT TO USE A LIMITED COMPANY?

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. TAX TREATMENT OF PROFITS

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company (which we'll come to later), but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.

2. TAX TREATMENT OF MORTGAGE INTEREST

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.

(The change is being phased in from April 2017.)

The post I've linked to goes into how it all works, but the upshot is that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX

Property held within a company gives more options when it comes to planning for Inheritance Tax. It's all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because of course, there are downsides too…

WHY NOT INVEST THROUGH A LIMITED COMPANY?

1. MORTGAGE AVAILABILITY

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction, lenders are following in order to win their business.

You will still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a dealbreaker than it once was.

2. DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.

But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a hefty whack in dividend tax on what's left (current rates here) in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. EXTRA COST AND HASSLE

Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

HOW TO DECIDE IF USING A LIMITED COMPANY IS RIGHT FOR YOU

Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on three factors:

HOW MUCH INCOME DO YOU HAVE?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

DO YOU WANT THE PROPERTY INCOME TO LIVE OFF?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

DO YOU USE MORTGAGES?

The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.

WHO ARE YOU BUYING PROPERTIES FOR?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

SO THE ANSWER IS, OF COURSE…”IT DEPENDS”

Phew…1,300 words in and we’ve still really only scratched the surface of this whole debate.

If there's one thin we've learnt, it's that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.

Before doing so, you should absolutely speak to us at Cloud Accounting LLP rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.

Myths about HMRC’s powers

Myths about HMRC’s powers means it often overreaches during inspections.

HMRC can open documents that are visible but cannot search for them

Common myths businesses have about the extent of HMRC’s powers during an inspection means it is often able to overreach. These myths need to be debunked to avoid HMRC finding evidence that it should not have been allowed to. HMRC uses inspections as means to gather the evidence needed for its investigations.

HMRC will look to push the limits of its powers and inspectors will often use ‘force of personality’ to get what they want. It is therefore important that businesses are aware of the limits on HMRC’s powers; this includes:

1. Myth: HMRC can search for documents during an inspection 
When making an inspection, HMRC can touch and open documents that are visible but cannot actually search for something that is not visible. The broad rule that businesses need to know is “inspect is by eye and search is by hand”.

HMRC also cannot copy documents, remove documents or enter vehicles on the premises.

2. Myth: HMRC can inspect any document it wants
Certain documents cannot be inspected; for example, this includes documents that are older than six years, documents with legal privilege and tax advice documents.

3. Myth: HMRC can enter the premises when making an unannounced visit 
HMRC cannot make a forced entry and entry can be refused. If this happens, then HMRC must withdraw immediately. It is worth bearing in mind that this could be fine if a tribunal rules that entry should have been allowed, although this is unlikely. However, HMRC can make a forced entry when conducting a raid.

4. Myth: HMRC can require a business to add up sales revenues
During an inspection, HMRC can inspect assets on the premises which includes cash. However, HMRC has no power to require a business to ‘cash up’ during an inspection – this means adding up the cash generated during a trading period.

If HMRC decides to visit a business and do an inspection, there are steps management can take to reduce its impact. For example: inviting inspectors into a private room away from staff and documents; check the inspection notice has been signed by an authorized officer; and call their accountant immediately.

HMRC will look to push the envelope where it can so it’s crucial businesses are aware of their rights.

These myths means that businesses could find themselves handing over documents and assets that they didn’t need to do. This can result in problems if HMRC then uses what it finds to launch a full blown investigation.

Businesses should seriously consider our Fee Protection to cover the significant costs of advisor during these lengthy investigations.

Responsibilities of a company director

Many people reading this will no doubt already be company directors, while a few may be thinking about establishing a company and becoming its director.

The beginning point for any company’s director, and consequently the starting point for any company’s director, is to learn a little bit more in detail about the roles and duties of the directors.

Although a company is owned by its shareholders, they entrust the administration of the company to the directors (even though in most cases, the shareholders and the directors are the same people). Clear and reasonable duties for the directors are essential both to safeguard the interests of the subscribers as well as the directors themselves. Consequently, the directors understand what is required of them, what they are to do and what not to do. Should the directors fail in their duties, the consequences could be serious.

 General duties that apply to all directors as laid out by the companies’ act 2006:

  • A responsibility to function within their powers, as laid out in the company’s Articles of Association, memo and as well as other sources
  • A responsibility to improve the company’s success.
  • A responsibility to apply independent judgements
  • A responsibility to apply realistic diligence, skill and care
  • A responsibility to circumvent clash of interests
  • A responsibility to reject benefits from any third party
  • A responsibility to unveil interests in a planned arrangement or transaction

Even though it has no advantaged status in law, the obligation to promote the company’s success lies at the heart of a director’s responsibilities. Other responsibilities of directors, whether it is specified in UK legislation or not, can be seen as following on from that. In increasing the company’s success for the benefit of its shareholders as a whole, the Companies Act states that directors need to think about the effect of decisions on the reputation of the company and the interests of other subscribers including workers, shareholders, clients, suppliers, as well as the community at large.

Generally, the directors may apply all the powers of the company. However, the company’s Articles of Association may set limitations on the powers of the directors in some areas– a common instance includes limitation on new shares allocation in the company among others. Thus, it is typical of the directors to offer new shares to the current shareholders prior to inviting applications more widely.

Additionally, the articles will define how decisions should be made. Although limited company directors will, as a board, jointly bind the company, the articles generally give power to the board of directors to entrust powers to each director as they deem fit.  The specific role of each director within a company may vary based on the company size, the number of directors, and the nature of the company’s business. The role, expertise and experience of a director will likewise have an impact on their areas and influence their areas of responsibility and coverage.

5 biggest mistakes when forming a UK company

Forming a new company is an exciting time for anyone. Over the years, the UK authorities have made it easier than ever to open a company. You don’t need to fill in lots of forms and send them to Companies House. It’s a matter of using their online portal to form your company.

Once you have finished, and your company has been accepted, you will be requested to print out various forms. This is will confirm that your company has been officially incorporated. It may sound too easy, but there are no hidden catches here.

But what are the biggest mistakes people make when doing this?

Forming the Wrong Company

There are many company types you have to take into account. The average small business will be better off forming a company that allows them to trade as a sole trader. It may be good to have a limited company, but limited companies come with far greater reporting responsibilities, and this extra work doesn’t always pay dividends.

You can form practically any type of company online. Make sure you do your research and don’t form a certain type of company on a whim.

Not Specifying the Shareholders

Technically, you can have as many people as you like working for your company, but if they own any part of that company they have to be mentioned. Shareholders don’t work in the same way as they do in other parts of the world. With a private limited company, for example, the shares are valued at what you say they are valued at, and you can dole them out as you please.

Only public companies have shares that are traded on the open market, and the company needs to generate enough revenue in order to become this type of company.

If you are sharing the company with someone else, they must be mentioned when you form your company, or at least added afterwards. Adding them before the company is formed will involve them placing their names on the Memorandums of Association, which is essentially an agreement to form the company.

How the Company is Run

This is where people tend to start making errors. Dictating how the company is run is a deceptive task because people assume it refers to the day-to-day running of the company. For most companies, they will use what’s known as ‘standard article’. These are a basic legal model that can be inserted via the Companies House website.

You can change this, but by doing so you are waiving your right to register your company online. The vast majority of companies have no business changing these.

Choosing the Wrong Company Address

The company address is more important than you think. It’s where official communications between the UK government and you will be sent. It doesn’t have to be the offices you are operating out of. You can use your home address. The only restrictions are that it must be in the company’s home country, and it has to be a physical address; so you can’t use virtual addresses.

What a lot of people don’t realise is that this address is available to the general public via the official register of the companies of the UK. Make sure you are comfortable with this before choosing your home address.

Failing to Register for Corporation Tax

Sole traders don’t have to worry about corporation tax, which is why most prefer to register as this type of company. If you have decided to start a private limited company, you have a legal duty to register for corporation tax within three months of forming your company so you can begin trading.

Without registering for it, you are legally unable to begin trading. And even if you never earn enough to actually pay corporation tax, you still have to be registered for it and you still have to file.

Conclusion

The responsibilities of a company director are to file your company right. By avoiding these mistakes, you can avoid running into trouble. What are the biggest challenges you have faced when trying to form your company?

Opening a UK business bank account as a non resident

There are an increasing number of foreigners opening companies in the UK. The majority of formations agents receive questions regarding the opening of a bank account all the time. The brutal truth is that although you need a limited number of documents to form a limited company, opening up a bank account can be difficult.

Banks tend to be far more conservative and they commonly reject applications from overseas residents. This article is going to show you what you need to do to open a bank account as a foreigner.

You Don’t Need a UK Bank Account

One of the misconceptions people have about forming a new company online is that they need a UK bank account to operate. In many countries, it’s necessary to open an account in order to trade. The UK allows you to use your account from abroad, as long as you make it clear that you are using a foreign bank account.

But it’s always better to have a UK bank account because it makes it easy to trade. Imagine the difficulties of trying to make overseas transactions all the time. It’s a hassle you don’t need when opening a company.

Do You Need to Live in the UK?

No, it’s not necessary to live in the UK in order to open a bank account. It’s wise to acquire UK residency before applying for one, though. Most banks won’t entertain an application unless you have UK residency. This is due to concerns over fraud and the additional administration costs incurred by them.

registered office address isn’t enough for most banks. You need to prove that you have residency and you need a home address.

What Options Do You Have for Business Bank Accounts?

The following information was correct as of this writing. The bank account opening process is the same for practically all banks. You will have to submit both personal and company information. Luckily, UK banks have a step-by-step process you can follow, and you can always have your agent handle most of the process for you.

A face-to-face interview is always required, and you will have to submit suitable identification, such as a passport or UK driver’s licence. The following banks have different conditions regarding non-nationals opening business bank accounts.

HSBC – Non-resident directors can open an account, but the owners of the company have to visit the UK and present a photographic ID, along with proof of address. They will also have to sign a bank mandate.

Lloyds Bank – Lloyds offers business bank accounts for non-residents, but only if one director lives in the UK. This UK resident has to visit the bank in person.

Barclays – There are no stipulations for opening international bank accounts with Barclays. But international accounts must begin from their branch in the Isle of Man. You will still have the same benefits as onshore account holders, but your account will be classified as offshore.

A Barclays account does demand that you have to place £25,000 into that account within the first month of opening it. Sometimes they do waive the requirement if you include a covering letter in your application, though.

What is the Situation Like on the Ground?

The way to ensure that you get your application accepted is to look at the situation from the point of view of the banks. You have to assume that they are always looking at the potential for fraud. An offer to leave a large deposit in the account will help them to believe that you are serious.

If you can prove that you have an address in the UK, this is another plus point in your favour. Multiple directors and shareholders is another sign of trustworthiness because they are not relying on one single person to deal with them. If something goes wrong, they have multiple points of contact.

In general, the process of opening a business bank account in the UK isn’t too hazardous. It can take a few weeks to open, so it’s best to get this out of the way before you formally start trading.

What are the biggest problems you have experienced when it comes to trying to open up a business bank account in the UK?

CLOUD ACCOUNTING LLP

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