Flipping Properties In A Limited Company & Claiming Entrepreneurs’ Relief

Are you looking to flip properties?

Did you know that you could pay 40% tax on that flip?

Different types of property tax to pay

I hear a lot of horror stories where investors think that they will get Capital Gains Allowances and pay just 18% tax on the profit made. Sadly, there is a criteria that must be met to ensure that CGT is paid rather than income tax.

Capital Gains Tax (CGT)

This is where you pay tax on properties that you have purchased, refurbed, rented and then sold.

Income Tax

Income tax is paid when you purchase, refurb and sell a property. Please note that the property would not have been rented. The tax you pay will therefore be based on your total income.

If you sell a property the maximum amount of tax you pay is as follows:

• Personal income tax 20%/40%/45%
• CGT 18%/28%
• 20% corporation tax

Special purpose vehicle (SPV) — limited company

I would advise that people set up a limited company as a special purpose vehicle (SPV). The reason for this advice is because:

• A limited company limits the financial risks to the limited company, not your personal assets
• As a limited company you are not tying yourself financially to any joint venture partner
• There is a perceived enhanced reputation by using a limited company
• It is more tax efficient to have a limited company that is only taxed at 20% compared to a maximum of 45% income tax as an individual.

Entrepreneurs’ relief to mitigate CGT

You can claim entrepreneurs’ relief when you sell a property within a limited company that has paid corporation tax.

So, how much tax do you pay? You will pay 10% tax by making use of entrepreneurs’ relief rather than 18%/28% CGT.

Here is the process of setting up a limited company:

1 – Agree who are going to be the investors. They agree to put in £1 shares each

2 – Agree the amount of money that is to be loaned to the company

3 – Set up a limited company

4 – Set up a limited company bank account

5 – Ensure that bookkeeping is neat and tidy by using online software such as Xero

6 – Carry out the business/property transaction, making sure you get invoices for all the money that you spend

7 – The company is taxed at 20% of any profits made

8 – Pay back any loans made

9 – The company is closed down and remaining cash is distributed to the shareholders

10 – Shareholders are taxed at 10% entrepreneurs’ relief on closing down the limited company, after receiving the CGT allowance.

Example of entrepreneurs’ relief 

1 – John and Jim agree to set up ABC Limited with £1 equity each

2 – They both agree to put in an additional £49,999 each as a loan

3 – An agreement is formed and signed

4 – ABC Limited is born on 3rd January 2015

5 – Bank accounts are set up so that one person issues a payment to be made and the other person has to authorise it. This ensures financial control of the money within the business. It also ensures that the two agree how the money is spent in advance

6 – Jim agrees that he should look after all the paperwork

7 – They buy a property for £100,000 and sell it for £150,000. The business has therefore made £50,000

8 – At the end of the financial year, 2nd January 2016, they work out that the profits are £50,000 as above and their accountant informs them that the 20% tax of £10,000 needs to be paid nine months later. This means that the business will have £140,000 (£2 equity plus £99,998 loan + £40,000 profit less £10,000 tax bill) left in the bank after the tax has been paid

9 – The company pays back the two loans of £49,999 (each). This leaves the company with £40,002 (£40,000 profit after tax and £2 equity shares)

10 – The balance of £40,002 is split between the two brothers. Each therefore gets £20,001 (£20,000 share of the profits plus £1 equity)

11 – Jim and John do their self assessments after closing the company down and they claim entrepreneurs’ relief at 10%. Tax is calculated as follows:

£20,001 profit plus the £1 equity

(£1) less the equity involved

(£11,000) less Capital Gains tax allowance

£9,000 taxable profit

£900 tax to pay (10% of the £9,000)

Please note to qualify for entrepreneurs’ relief the following must apply:

– you’re a sole trader or business partner

– you’ve owned the business for at least one year before the date you sell or close it

– you sell or dispose of your business assets within three years of selling or closing the business

Next steps to using entrepreneurs’ relief

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.

Using Multiple Limited Companies As A Property Investor

Are you unsure how to structure your property business?

Is the thought of using a limited company a little daunting?

You may wish to mitigate the budget announcement tax implications. Perhaps you saw the article I wrote on the budget announcement and as such you are looking to transfer properties into a limited company.

You could be hit by a Capital Gains Tax (CGT) bill if you are thinking of transferring properties into a limited company that is currently in your own name. However, as another of my articles explains, if you are working full-time in property you may be able to mitigate CGT.

Limited companies are a very useful way to reduce tax if you are trading properties, ie, engaging in buy to sell. The amount of income tax that you pay when flipping houses in your personal name could be as much as 45%, and you will also face additional costs for national insurance. In an earlier article, I explained how you could minimise this by trading properties using a limited company.

The problem — too many limited companies causes mayhem

There are many property investors who are using limited companies in the wrong way. They are mixing up trade activities with investment holding companies. There are also some property investors who have more than three limited companies because they have set up a limited company for each property deal/joint venture.

The issues with having lots of limited companies in the wrong structure can be seen below:

• An administrative nightmare to look after each limited company with receipts and paperwork, something I outlined in a previous article
• Several bookkeeping spreadsheets/online systems
• A wallet/purse full of company cards and always having to make sure you use the correct one
• Multiple bank accounts and bank statmenets
• Additional accountancy costs for the annual accounts
• Filing of several annual returns
• Difficulty with tax planning as you are personally receiving wages/dividends from different sources

Can you relate to the above?

Can you see how things can get really messy?

If you have answered yes to these questions then keep reading for some solutions.

A real life client example — setting up too many companies

For the purpose of this article we are going to name my client John to protect his identity.

John has more than 20 properties, some of which are in his name and some of which belong to his 15 limited companies. John is buying properties but not thinking with the end in mind, so he buys them all in separate limited companies. He is working with different joint venture partners and decides to set up one limited company for each one.

Within his own limited company he is mixing buy to hold properties with buy to sell in the same company.

All in all the 15 limited companies are simply tying him up in knots with paperwork, administration, constant phone calls to his accountant to discuss the year end and filing annual returns. This leaves him with little time for himself and his family or to develop his business. He has now become an administrator and is consequently annoyed and frustrated.

The issue with mixing up buy to hold and buy to sell properties within a limited company can be quite harmful because:

• When you flip there is a degree of risk. Your other properties are at risk if everything goes wrong with that property flip and it creates a significant liability which is greater than the value of the property.
• If you mix up buy to hold and buy to sell then you lose the right to claim entrepreneurs’ relief.

Practical steps you should now take to set up just two limited companies

It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy:

1. Set up a limited company for you that holds property as a long-term investment
2. Set up another limited company if you are looking to buy and sell (flip) properties
3. Agree with joint venture partners that they can have a charge over the property purchased that ensures that they get a percentage of profit and/or a percentage of the uplift in market value. They do not need to be a shareholder of either of your limited companies.

See how easy the above is? You can hopefully now see that there is no need to set up limited companies for each property or each joint venture.

If you are thinking about setting up a limited company to do flips then you may need to consider whether you need to be Construction Industry Scheme (CIS) registered. If you are buying properties to sell and making significant changes to then read this article to work out where you stand on CIS.

Next steps to set up the right structure for your property investments

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.