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Should You Use a Limited Company to Buy a Holiday Home in "New Europe"?
One of our favourite summer topics: owning a property abroad. But who should buy it – you personally or a Limited company?
Why use a Company?
Local laws. It can be convenient to purchase a property jointly or as an individual, but in countries in new Europe such as Bulgaria, for instance, current domestic laws prohibit you from owning an interest in land. In that case, you must purchase the land using a Bulgarian company that you have to set up; it will be taxed as a company in Bulgaria, and pay local taxes. In other countries, of which France is a prime example, Inheritance Tax concerns mean that it is essential for you to purchase property by using the local equivalent of a company.
What the UK Taxman Says
HM Revenue and Customs has in the past suggested that if you did own your holiday home in this way, then a benefit-in-kind charge would apply in respect of accommodation available to you. This created a major disclosure calculation problem for you if you invested abroad via a Limited company.
Budget 2007 – What the Prime Minister in Waiting Said
In this budget the Chancellor announced in Budget Notice 50 his intention to bring forward legislation in the Finance Bill 2008 to ensure that individuals who have bought, or will buy, a home abroad, will not face a benefit-in-kind tax charge for any private use of the property if purchased through a company, providing certain conditions are met. These are likely to include (1) that the company is used by you as a vehicle to purchase a holiday home and its only activities are incidental to its ownership of that property, which is its main asset; and (2) that the property is not funded directly or indirectly by a connected company.
UK Corporation Tax – Trap (or what the Prime Minister did not tell us!)
Trap. Any foreign company will be treated by the UK Taxman as associated to your UK company if: (1) it is carrying on in business; and (2) you or your associates control it. In summary, this means the levels at which you start paying higher rates of Corporation Tax start earlier. This is true for the company holding the property, but perhaps more importantly also for any other UK Limited company which you control.
Tip 1. To prevent your foreign company being “in business”, any rental should be managed, and income received, by its beneficial owner (you), who should be declaring the income on their individual UK tax return. This means that for all tax purposes the overseas company is a nominee, just a holding company for you, the beneficial owner.
Tip 2. You might need to haggle with the Taxman on the associated company issue. Argue that (1) you qualify for BN50 treatment; (2) the company has no rental income; and (3) its only activities are incidental to its ownership of the property, so it should be treated as dormant for UK associated company purposes.
Tip 3. An alternative way around this is to own the land via a foreign company and the bricks and mortar as an individual. It is something worth considering when looking at homes in new Europe (and something, perhaps, to unravel if your purchase has already been made wholly via a company).
Should you have any queries regarding this article please contact Steve Cook, Tax Partner, at steve@nunn-hayward.com or call 01753 888211.
STOP PRESS
New Advisory Fuel Rates (Again!)
H M Revenue & Customs (H M Revenue & Customs) recently announced that the advisory fuel rates for company cars will change (again) from 1 August 2007. The announcement is in line with the agreement reached earlier this year to give one month’s notice of any changes (this followed HRMC’s announcement on February 1 2007 of rates intended to apply from that date, which brought forth a lot of protest from employers.
Advisory fuel rates are the guideline rates at which employers can reimburse employees for business travel in their company cars, or require employees to repay the cost of fuel used for private travel in company cars, without tax or NI implications.
If you require further clarification on this subject please contact Steve Cook at steve@nunn-hayward.com or call him on 01753 888211.
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Can you Reduce the Cost of University Accommodation?
If one of your children is off to university this September he or she will need a place to live whilst studying. Is there a way you can help them out and save tax into the bargain?
Cheaper to buy than rent
The cost of accommodation is one of the biggest financial burdens for any student/parent. Unless they are in halls of residence many students are expected by their landlords to pay rent for a full twelve months, not just for term time. There are also deposits to find.
For example, three students sharing a terraced house could quite easily pay £165 a month each – plus a share of the bills. This means at least £1,980 (£165 x 12) to find plus a deposit. That’s £3,356 (£1,980 x 100/59) of your gross salary gone.
If you can afford to buy a home for your child to live in, the annual maintenance you pay to support him or her could be reduced. For example, your child could pay no rent, but the other two students would pay a total of £3,960 (£1,980 x 2) in rent to you as landlord. Dividing the rent by an interest rate gives you the (interest only) mortgage you can afford. If the interest rate is 7% then you could fund £56,571 (£3,960/0.07) of the mortgage. Worth considering, particularly if you could also make a capital gain on the property on sale.
Tax trap 1 – Unfortunately, rental income (less expenses) is taxable. You cannot use the tax-free-rent-a-room scheme because the property is not your Principal Private Residence (PPR).
Tax trap 2 – Any capital gain you make on the property is taxable at your top rate of tax. For example, on a £20,000 gain you would lose £8,000 (£20,000 x 40%) in Capital Gains Tax (CGT) if you are a 40% taxpayer. However, there is a solution to this potential CGT problem that can also reduce the Income tax bill.
Step 1
The property can be purchased using a loan secured on your own home, or with capital provided directly by yourself or other relatives. In either case legally transfer the property into the name of the adult student. This way the property will be treated as his or her PPR so will be free of CGT when sold.
The capital you provide can be treated as a loan to be repaid when the property is sold. The loan agreement between you and the student can be drawn up quite simply in the form of a letter. You may want the capital to gather interest at a set rate. The agreement can allow any annual interest due to be rolled-up with the capital and be paid when the capital is returned.
Step 2
Once the student is in residence, he or she can generate some tax-free income by letting rooms to friends (as long as the total rent is any tax year is no more than the rent-a-room limit of £4,250). If the rent exceeds this limit the student can elect to be taxed on just the excess, which may be covered by his tax-free personal allowance of £5,225 for 2007/08, meaning he or she has income for books and beer during term time and needs less financial support from you.
If you have any queries regarding this article please contact Steve Cook at steve@nunn-hayward.com or call on 01753 888211.
Important Tax Dates
| August | | | |
| 31 | | Annual adjustment for VAT partial exemption calculations (May VAT year end) | | | | | | Deadline for tax credit Annual Declaration (if estimated, final figures required by 31 January 2008 |
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Please contact us to discuss the above further
Tel: 01753 888211 Fax: 01753 889669
Email: abacus@nunn-hayward.com
Nunn Hayward, Sterling House, 20 Station Road, Gerrards Cross, Bucks SL9 8EL. |
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Chartered Accountants, Registered Auditors and Insolvency Practitioners. This publication has been prepared as a guide only to topics of current financial and business interest. It is not intended to be a substitute for professional advice. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by either the authors or Nunn Hayward. All rights reserved. If you would like to subscribe to future editions of the Abacus Newsletter then please e-mail your name and address and we will add you to our mailing list.
© 2007 Nunn Hayward. All rights reserved |
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