Introduction
Contractors who fall outside IR35 and use a limited company structure pay
themselves a low salary and receive the rest in dividends from the company
profit.
Some contractors consider the possibility of using profits for property
investment within the company. However, in most cases it is not advisable for
the following reasons:
Capital gains tax issues
Investing via a limited company means losing out on many exemptions and reliefs
available only to individuals, including exemption for principle place of
residence (if you live in the property) and taper relief.
In addition, when the property is sold, you may face a double tax bill on the
proceeds, since the company will have to pay tax on the capital gain and if you
then wish to extract the profit from the company, you will need to pay further
personal tax on the income or gain arising.
Questionable tax saving
The allocation of company profits after corporation tax to the purchase of
investment property rather than distribution to the shareholders, will not
generate any tax saving whatsoever if you are a basic rate tax payer.
Only in the event that you are a higher rate tax payer will you postpone the
higher rate tax liability. On the assumption that you will one day sell the
property and hopefully make a profit, the day will come that you will wish to
extract that profit, at which time you will need to pay the tax at whatever
rates apply then. Only in the event that the investment turns out bad, would
you have actually saved tax.
Contractual risks
As a consultant you do run the risk, however small, of being sued for
negligence, etc., and in the event that you are not fully covered by a
professional indemnity policy, any legal action directed at your limited
company would put at risk any assets held in that company.
P11D / Benefit in kind issues
If you derive any personal benefit from the company’s ownership of the
property, e.g. occupation, holiday home, etc., then you will be taxed on the
benefit in kind. No such charges arise if you own the property personally.
Business climate
Without wishing to take a political slant, it can hardly be denied that the
advent of IR35, Section 660/Arctic case and increasing regulation on small
limited companies, has significantly decreased the average life span of a one
person consultancy company.
The placement of an investment property within such
a company may prove a great inconvenience in the event that you wish to have
the company dissolved. Prior to dissolution, the property would need to be
transferred out of the company, which would crystallise any capital gains, in
addition to stamp duty and legal costs of transfer.
Conclusion
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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For all of the above reasons, you would be best advised to keep your investment
property outside of your consultancy company. It may be that your personal
circumstances and future plans would make it appropriate for an investment
property to be placed within a limited company, but this should be a separate
limited company set up for the specific purpose of property investment.
Published: Wednesday, May 24, 2006
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