October 29th, 2012 / Insight posted in

Don’t put home into your firm

OJ writes: Having recently separated from my wife, I have been looking at ways of restructuring my finances. Can my limited company buy my home from me using a commercial mortgage? Would there be any drawbacks?

Putting your home into a company is generally not a good idea, writes Jon Sutcliffe, partner at Kingston Smith LLP.

In addition to legal costs, the sale of your home to the company will give rise to stamp-duty land tax. However, if this is your principal private residence, you will not have to pay tax on any capital gain you make when you sell it.

Once the home has been transferred to the company, you will need to pay the company a full market rent for the use of it. If you do not, a taxable benefit in kind will arise. The company will be liable to corporation tax on the rental income after deducting the commercial mortgage interest and any other expenses. The rate of corporation tax can be as high as 28% if the company is a “close investment holding company” as a result of the purchase, so it is worth checking this with your accountant.

When the company sells the property, it will have to pay tax on any gain it makes. There may also be a personal tax cost if you want to take this profit out of the company to buy a privately-owned home later.

You should look at rentals on comparable properties and find out what the interest on a commercial mortgage will be. You may find that it will be easier for you to restructure your finances by drawing extra money out of your company and taking the hit on your personal tax bill.

There are some circumstances where transferring your home into a company may be beneficial — for example, to release equity where a property will be sold in the future or where there may be wider plans to develop the property. These should always be looked at carefully on a case-by-case basis.