Contractors' Questions: Should my son rent my PSC-bought property?
Contractor’s Question: In light of this guidance on purchasing a house via a PSC, would it be better from a tax standpoint to buy the property by the company and rent it out to the user of the property, my son, thereby establishing a landlord-tenant relationship?
Expert’s Answer: Although the approach you suggest would avoid the need to extract money from the company, it would have a number of tax implications and overall may well not be better.
Firstly, the Stamp Duty Land Tax (SDLT) payable by the company is likely to be higher than the amount your son would pay if buying the property personally. If the property price is more than £500,000, then because the property is going to be rented out to your son, SDLT will be payable at a flat 15%. Even if the purchase price is less than £500,000, the rates of SDLT payable by the company will be 3% higher than the standard rates that apply to individuals.
Then, because the property is going to be rented out to your son, the company will also be subject to the Annual Tax on Enveloped Dwellings (ATED) if the property is worth more than £500,000. This annual charge is currently set at £3,500 per year for properties worth between £500,000 and £1,000,000.
The company will be subject to corporation tax on the profits of its rental activity and any gain it makes as and when it eventually sells the property. In addition, if your son pays less than a market rent, a taxable benefit could arise in your hands.
Lastly, it is worth noting that your company will be carrying on a non-trading activity and this could have an impact on your ability to claim Entrepreneurs’ Relief on a future sale or liquidation of the company (meaning a higher tax bill in your hands).
When you also consider the fact that this approach will not allow your son to get onto the housing ladder and to share in any growth in the value of the property, it may not be a particularly attractive alternative.
The expert was Andrew Constable, tax partner at chartered accountancy firm Kingston Smith LLP.