Your company has accumulated cash and profits to match. You could draw the money as salary or a dividend but that will trigger a large tax bill. Instead, can your company buy your home as an investment, and if so what are the main tax consequences?
Company purchase
As you would expect, if your company buys a property for you to live in there are tax consequences. You’ll be taxed on a benefit in kind linked to the value of the property. Your company will have to pay Class 1A NI at 13.8% of this. This is a relatively low tax cost, but there are further and higher tax charges faced by your company.
SDLT and ATED
Your company can face higher stamp duty land tax (SDLT) charges than if you purchased your new home personally. If the property costs more than £500,000 it will have to pay SDLT at 15% compared with the variable rates for a personal purchase, which are lower except for properties costing more than £1,500,000. On top of this your company might be subject to the annual tax on enveloped dwellings (ATED). Since 1 April 2016 ATED applies on properties worth £500,000 or more. The charge is banded starting from £3,650 (for 2019/20) for properties worth between £500,000 and £1 million.
Tip. Properties valued at less than £500,000 aren’t subject to the higher SDLT or ATED.
Capital gains tax
Another big drawback to company ownership is that when it’s sold the capital gains tax (CGT) relief, known as private residence relief, which prevents a tax charge arising for individuals, won’t apply. That means your company will have to pay corporation tax at a special rate on the full amount of any gain it makes. The blow will be softened a little because companies are allowed to reduce the gain on which they are taxed by the effects of inflation over the period of ownership
Trap. Where a property is caught by the ATED charge a special tax rate of 28% applies to the gain instead of the usual CT rate (19% for 2019/20).
Company ownership is costly
You’ll have worked out by now that HMRC really isn’t keen on companies owning residential accommodation as an investment or for directors to occupy as their homes. But that doesn’t mean to say that your company can’t be involved indirectly in helping you buy your dream home.
A company loan
Your company could advance you a low or interest-free loan to meet some or all of the purchase price. This arrangement results in a fairly modest taxable benefit for you if the loan exceeds £10,000 which is 3% of the average loan balance over the tax year. Your company must pay Class 1A NI on the amount of the benefit, plus, there’s a related tax charge on the company.
Company’s temporary tax
If your company lends to you for a long period it must pay a one-off tax charge equal to 32.5% of the loan. This is refunded when the debt is repaid.
Tip. If you combine a mortgage with a loan from your company, consider making the mortgage interest only at first. This will reduce repayments allowing you to repay the company sooner. That will reduce the personal tax for you and accelerate the refund for the company’s temporary tax charge.