PROPERTY - 19.09.2011

Potential tax break on company-owned property

Profit extraction

The general idea of using a company as a tax shelter is to keep profits locked into the business because director/shareholders don’t have to pay tax until they take money or value out. But what happens then? Well, you could pack up and leave the UK for a low tax regime, or if you’re willing to sell or wind up your company you can keep the tax charges as low as 10%. But neither of these may be on your agenda. However, the recent fall in property values could offer you a more down-to-earth tax-saving opportunity.

Company property

Where your company has owned its trading premises or an investment property for some time, its value has probably dropped over recent years. If so, now may be a good time to transfer it to the director/shareholders because the resulting tax charges will be less than when property values were higher. And once the property is in the hands of the director/shareholders they can charge the company rent for using it. This is a tax-efficient way to extract future company profits compared to salary or even dividends because:

• neither the company nor the director will have to pay NI on the rents paid
• the director can give a share of the property to their spouse, which can reduce the overall tax bill if they pay at a lower rate than the director.

Transfer tax charges

Where your company transfers a property into your name this is treated, for tax purposes, as if it sold it at market value and if this is more than what the company paid for it, Corporation Tax (CT) will be payable on the gain. But when property prices fall so does the tax bill for transferring to you. Better still, while property values have dropped, inflation has continued to rise and companies can claim this as a deduction from the deemed gain they make when they transfer the property. This is called an indexation allowance.

Example. In 2002 Acom Ltd used its accumulated profits to buy trading premises for £170,000. By 2008 this was worth £225,000 but the value is now £190,000. Had the directors transferred the property to themselves in 1998 Acom would have had to pay CT on just over £45,000 (see The next step). But now Acom can transfer the property and pay less or even no CT.

Trap. The transfer of property will count as taxable income for the director/shareholders. But there is a way to minimise this.

Tip. Treat the transfer as an “in specie” dividend, this means transferring an asset instead of paying a cash dividend. This will keep the directors’ tax bill to a minimum (see The next step). What’s more, using this method to transfer the property means there’s no Stamp Duty Land Tax to pay.

Good or bad idea?

Extracting profits from their business is the ultimate goal for most director/shareholders. Transferring property out of the company into personal ownership can be a good way to do this. But check the tax consequences for yourself and the company before going ahead.

For calculations behind the example, visit http://companydirector.indicator.co.uk (CD 12.22.04).