Contractors' Questions: Can my limited company help buy a property?

Contractor’s Question: Can my limited company help fund the purchase of a house for my son? My plan is to give him some shares so he can have a dividend, but will there be big tax implications? Or should I withdraw cash myself from the company, which has healthy reserves, or would lending it to him be more tax-efficient? 

Expert’s Answer: It is possible to help your son with the purchase of a property via your company in the ways you suggest, although you would face a tax charge no matter which of the options you pursued.

Let’s explore your final suggestion of your company being a lender. Your company could indeed loan him the money but the ‘loans to participator rules’ would apply. In particular, 32.5% of the sum involved would need to be paid by your company to HMRC, although you would get this back once the loan is fully repaid.

Bear in mind that although lending him the money would probably be the most tax-efficient option for you overall, it has an immediate cashflow disadvantage. It could also result in a taxable benefit in kind, unless the company charged interest on the loan of at least 3%.

As regards your other suggestion of gifting shares, this would typically give rise to capital gains tax in your hands based on the company’s market value although you may be able to use Entrepreneurs’ Relief to lower your liability to just 10% of your gain. Alternatively, a joint claim by you and your son for the capital gains to be ‘held over’ and taxed in his hands when he disposes of the shares may be a possibility.

And remember, tax would be payable on any dividends your son receives. Since April this year, the first £5,000 of dividends are tax free but additional dividends are subject to tax at the band rates 7.5%, 32.5% and 38.1%, dependent on your son’s other income and overall earnings.

Whichever of the options you choose to help your son by using your limited company to partially fund a property purchase for him, I recommend that you both sit down with an accountant in advance of you pursuing it.

The expert was Jon Dawson, partner at chartered accountancy firm Kingston Smith LLP.

Editor's Note:  Related Reading - 

Contractors' Questions: Should my son rent my PSC-bought property?

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Friday 3rd June 2016