Tax efficient ways to restructure your business to buy property

Tax efficient ways to restructure your business to buy property
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    If you are considering purchasing property to expand your business, then you are already one step closer to creating more financial freedom.

    Restructuring your business to invest in property is a smart way to make more significant tax savings. Depending on your income level and tax bracket, you can purchase property directly through your business entity or separate it from any trading activity. Each method has its own benefits.

    In this blog, we explore the different ways you can purchase property as a business owner and the various benefits and tax implications involved.

    At Archimedia Accounts, we are property tax and accounting experts dedicated to your business growth. We have over 30 years of experience helping businesses of all sizes make better tax savings and enhance their income.

    Alongside our accounting expertise, we have grown our own successful property portfolio, spanning both residential and commercial properties. Combining our professional and personal experience, we want to help you do the same, securing your financial future. Get in touch today for friendly financial advice.

    Can a business buy property?

    Buying a property through your business tends to have more tax benefits than buying as an individual.

    If you own a small business or limited company, then there are various ways to purchase property through that business. You can set up a new property investment company specifically for your property investments or purchase property directly through your current trading company.

    Many property investors choose to keep their property purchases separate from their existing trading company and, instead, transfer funds from their business to start buying property. This is often beneficial if you want to avoid your current company being liable for any debts or losses. Usually, a lender will require a Special Purpose Vehicle (SPV) to be set up for property investment companies.

    What is a Special Purpose Vehicle (SPV)?

    A Special Purpose Vehicle (SPV) is a separate legal entity created for a specific purpose, ultimately reducing financial risk.

    If you are looking to restructure your business to buy property, then a mortgage provider or bank will often insist on separating the lending by setting up an SPV. This protects the lender from receiving payment for its lending before any other creditor.

    Are there risks to using an SPV?

    While Special Purpose Vehicles can be helpful when setting up a property investment company, it is essential to be aware of any risks that might be involved.

    Since the SPV acts as a separate entity, it has its own financial obligations and liabilities to uphold. While running into financial difficulties may not affect your personal finances, it could affect the properties held within the SPV.

    Special Purpose Vehicles also tend to require more administration, along with separate filing to Companies House and HMRC. Plus, the poor performance of an SPV can affect the shareholders of the SPV’s other business dealings.

    What taxes does a business pay when it buys or sells property?

    When buying and selling property through your business, you will need to be aware of the various taxes you’ll be responsible for.

    Capital Gains Tax

    Capital Gains will be paid as part of your income tax if your property is owned in your personal name. However, if you have already utilised your basic rate band, you will pay 28% on the residential property Capital Gains.

    Corporation Tax

    Rental companies pay Corporation Tax on any taxable profits – this is the rental income minus all allowable expenses. Corporation Tax is also payable on any Capital Gains made on the sale of a property.

    From April 2023, the UK Corporation Tax rate increased from 19% to 25%, and companies with profits under £50,000 will pay 19%, while those over £250,000 will pay 25%. Companies with profits between £50,000 and £250,000 will be eligible for Marginal Relief. Therefore, the closer the taxable profits are to £250,000, the closer the rate charged to 25%.

    Stamp Duty Land Tax

    Stamp Duty Land Tax (SDLT) is paid on the purchase price of land or property, including VAT. Different rates apply according to the property type and purchaser, such as whether it is a residential or commercial property and its intended use.

    Companies and individuals investing in property tend to pay higher interest rates than homeowners. However, mortgage interest is classed as an allowable expense for property investment companies and could be a tax credit worth considering.

    SDLT on commercial property is charged at a lower percentage of the purchase price than residential investment property.

    Stamp Duty may be avoided if a property has been given in a will or as a gift. However, this depends on whether or not the property has been transferred to you mortgage-free. If it is mortgage-free, you won’t have to pay Stamp Duty on the property’s market value.

    Should you restructure your business before building a property portfolio?

    Building a property portfolio is a huge step in your financial endeavours. It is vital to plan and structure each new deal correctly. With careful planning and regular reviews of your property investment company, you can optimise your tax position for better tax savings.

    In what ways can you restructure a business?

    When looking to start a property portfolio as part of your business, there are many ways to structure the deals. Every business and individual’s circumstances differ, so deciding what works for you and your company is essential for a successful investment.

    We have listed the top ways of restructuring your business for purchasing property.

    Joint venture or partnership

    You may buy property in your own name or jointly with others. This could be a joint venture, partnership or a limited company. With a joint venture, you should always have an agreement in place and be clear on an exit strategy if things do not go as planned.

    Getting the structure right means the property business can run more efficiently, making more significant savings.

    Limited companies

    For property landlords, we generally advise holding your property portfolios in a limited company. It is more beneficial for tax purposes than holding property in your own name, particularly after section 24. A limited company can allow profit extraction in a tax-efficient way and wealth creation. Of course, everyone’s situation is different, so it is best to do your research.

    However, should you already own property in your own name and would like to move to a limited company for the tax benefits, then you should consider the costs involved. This can include Capital Gains Tax (CGT) as well as SDLT.

    The transfer of a business from an individual’s name to a limited company is treated very differently to an investment being transferred for Capital Gains Tax and Stamp Duty Land Tax purposes. If the business is transferred in exchange for shares issued by the company, the CGT can be deferred.

    This rule can apply to a property business as long as it is an incorporated business. It is not possible to obtain clearance from HMRC as to whether the property being transferred is a business, but reliance can be placed on the Ramsay Tax Tribunal case.

    Get in touch with our specialist property accountants today

    At Archimedia Accounts, we are dedicated to helping businesses grow. We have over 30 years of experience providing specialist tax and accounting support to many happy clients.

    Our extensive accounting experience and success in growing a large property portfolio means we are best placed to help you diversify your income. Not only will we take care of your business tax and accounting needs, but we will guide you in building your own property company, ensuring you utilise any tax relief you may be eligible for.

    Ultimately, we will help you find new ways to expand your business, making greater tax savings for now and in the future.

    If you are looking for financial security for you and your family, then contact our team today for professional advice.

    Picture of Chris Demetriou

    Chris Demetriou

    Chris is Head of Business Advisory​ at Archimedia Accounts and is a specialist in tax. For more advice book a FREE consultation:

    Contact Chris

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