PROFIT EXTRACTION - 02.11.2010

Getting property out of your company

Transfer costs

There are many reasons why you might want to transfer your company’s trading premises into your personal ownership, whether it’s retirement planning or just plain profit extraction. Whatever your reasons, because you’re taking value out of your company the Taxman will expect his dues. The trick is to keep these to a minimum. What are the options?

Paying the price

The obvious way to acquire the property is to simply pay your company for it, but unless you’ve got cash handy you’ll have to raise a loan to do it, not an easy task these days. And you’ll have to meet the loan repayments out of your taxed income, i.e. after PAYE tax and NI. Worse still, you’ll also have to cough up Stamp Duty Land Tax (SDLT) on the purchase price; on a property worth, say, £600,000 that’s another £24,000 out of your pocket and into the Taxman’s coffers.

Pay less

If you can’t afford the full price, you could just pay your company less for the property than it’s worth, but of course the Taxman won’t like this.

Trap. Where the amount you pay is below the full market price, the difference is taxable. For example, if the property were worth £600,000 and you could only raise a loan of £300,000, the difference of £300,000 would be taxed as if it were a dividend. This could land you with a tax bill of up to £108,000 (see The next step). And guess what, you’ll still have to pay SDLT based on the market value of the property and not the lower price you actually paid.

Company loan option

Alternatively, you could agree to pay your company the full whack, and just owe it the money. The trouble is that your company would have to pay tax equal to 25% of the debt. On a £600,000 property that’s £150,000, although your company gets this back if you repay the money, meaning you’re back to square one before you even consider the extra tax payable under the benefit-in-kind rules (see The next step). And there’s still the pesky SDLT!

Distribute your assets

It looks like every way you turn the Taxman will hit you hard, but all is not lost.

Tip. Your company can transfer the property as an “in specie dividend” to you. The procedure for this is the same as that for a normal dividend except instead of paying cash it transfers an asset to you. The paperwork for transferring is the same as if you were buying the property, meaning that you’ll have full title to it, but as you’re not paying or owing the company anything, no SDLT is payable. So, using the facts from our earlier examples, you’ll save £24,000. And as an in specie dividend is like any other as far as the Taxman is concerned, this means there’s no PAYE or NI to worry about.

Trap. Although an in specie dividend will cost you and your company less in income tax, NI and SDLT than the alternatives, there’s still significant tax costs that can arise when transferring a property into your own name, e.g. Corporation Tax and additional rate tax (see The next step).

For the calculations behind the figures (TX 11.03.03A) and for the tax costs of an in specie dividend (TX 11.03.03B), visit http://tax.indicator.co.uk.