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A client question

I’ve got a fair bit of money saved in my company.  Can I invest this in a buy to let property through the company rather than taking it as dividend?

Our reply

Problem is if you are anticipating capital growth on your BTL you are letting yourself in for higher tax later on.

Supposing you are a cash buyer now, £100k. Sell in five years time at £150k. Assume 40% taxpayer. Ignore rental income, as it will have an effective tax rate at 40% whatever you do.

Buy it personally, you suffer 25% on the £100k dividend, £25k. When you sell it, you pay 28% CGT less annual exemption on the profit – £50k-£10k, = £40k at 28% = £11k. Total tax £36k. Of which £11k is deferred five years. Profit after CGT is in your name.

Buy it in the business – no tax now on dividend extraction. When you sell it, 20% CGT on profit = £10k. 25% Higher Rate on extracting proceeds £140k after tax @ 25% = £35k – total £45k.

Alternatively if you took the proceeds out as part of closing the company down and were able to get it all out at 10% entrepreneurs relief (maybe, maybe not if there is a BTL on balance sheet) then 10% on £140k = £15k + £10k Corporation Tax = £24k – but if you couldn’t get ER then £140k at 28% = £39k + £10k on profit = £49k.

To be totally accurate you need to consider discounted cash flow, but with current low interest rates the effect won’t be huge.

In summary, unless you can time sale with closing the company down and you can be sure of ER – which isn’t available if there are substantial non business assets on balance sheet – then the figures suggest buying personally is a better marginal tax rate, subject to having a tax hit now rather than all deferred.

Similar considerations also apply to an alternative strategy of starting a second “property” company.

Finally, ingesting in long term assets through a trading company is something to be cautious about due to risk pooling; it is better to keep long term assets and trading in different names.  Generally advice is trade through a company, own assets personally.

But, as always, do the maths and take personalised advice.