“I woke up this morning feeling fine, had Man Utd on my mind, Jose’s playing the way that united should, oh yeah, something tells me I’m into something good.” Rang the chant in my head straight out of Old Trafford the night before where my boys and I enjoyed a resounding Man U win. But the biggest headache was the finalising of the financial settlement from the divorce. I’d lost half my equity, more than half of my pension and any spare cash I had. I was 53. I thought, yes, a limited company buy to let business will see me through on retirement, so a quick trip to my accountant and all was clear.
Creating an SPV Limited Company
The new company PAS Lettings Ltd was created registering with Companies House with 100 shares allocated to two controlling directors. I also made my three children directors as well since they’ll end up inheriting the business when I die.
Cost £12. We chose SIC codes:
- 68100 - Buying and selling own real estate
- 68209 - Other letting and operating of real estate
At the same time PASlettings.com and .co.uk domains were registered, and a holding page developed with contact details and objectives/mission of the firm.
Accounting for Ltd Company
We opted for a Financial Year ending March to coincide with the Fiscal Year and to give us 9 months to pay Corporation Tax. The first-year end will be 31st March 2018.
We started to receive an avalanche of grey envelopes from the tax man as soon as the business was created.
We appointed our accountants and chose a monthly payment option which includes payroll, production of year end returns, Corporation Tax calculations and submission and Companies House Annual Returns.
Data Protection and CRM
We registered with the Data Protection Registrar as we will be holding a limited amount of client data – this costs £35 per annum. Our CRM system – Office 365 – collects client information. Email addresses were created in Office 365 and business cards were printed.
Generally, the letting of residential property is an exempt supply for VAT purposes and no output VAT is charged on rent. Therefore, we have not registered for VAT.
We chose our companies Bankers – HSBC. We created a current account with online banking with free banking for 24 months. The usual debit cards and a cheque book were received (hello what’s a cheque book?). A company credit card was secured with outstanding debt to be cleared each month – useful for miscellaneous property expenditure.
For accounting, we decided to do this ourselves rather than pay an accountant to do our book keeping – that’s a thing of the past. We enrolled for Sage One, a cloud solution and started to input each expense that the new company made. As we weren’t making an income at this stage, there was no need to start receiving rents, but expenditure of the new company had already begun. We began collating all receipts and invoices in paper format and began filing these and we purchased Tax Insurance, in case were ever investigated by HMRC in the future.
PAS Lettings Ltd is currently not making any money so some “seed” money is required otherwise the bankers will become rather disillusioned. So, I’m injecting £40,000 into the business but to ensure our lender FHL, agrees to our first mortgage, we must be strict on how this is documented. Director, Paul Archer, to draw down dividends from his other limited company (Archer Training Ltd) and then give to the “borrower” PAS Lettings Ltd, with an expectation of repayment. Evidence of funds through statements of other company and director personal statements will be required by FHLs. So, we now have some deposit to put down on a mortgage.
Mortgaging First Property
We’re ready to buy our first property rental on a 2-bedroom terraced house in Tewkesbury, Purchase Price £145,000, Rental Value £650 per calendar month. PAS Lettings Ltd is not making much of a profit on its first property – to be expected and to cover costs is the objective in the first year. If a salary was to be paid, we would enable our accountants to process the monthly payroll. The PAYE system would ensure the employee pays their income tax and National Insurance. Naturally the business would also pay employer NI. We’re too small to be captured by the government’s Workplace Pension legislation or the Apprenticeship Levy.
First Year Trading, formal accounts and Corporation Tax
It’s now 31st March and time for the annual accountants. Thankfully we’ve kept SageOne up to date with all costs, income etc. We’ve also reconciled the bank statements as they arrived each month, so the accounts are in good condition.
We email the 31st March backup file to our accountants who set to do the accounts for the first years’ trading.
If you are a limited company director, one of your legal obligations is to ensure that your company’s annual accounts are submitted to Companies House accurately and on time.
Under typical circumstances, you must ensure that you submit your company annual accounts to Companies House within 10 months of your year-end date.
All limited companies must also complete a Corporation Tax return (CT600) each year. Your company statutory accounts must also be attached to this return.
Your annual accounts must be submitted within one year of your company’s year-end, although any Corporation Tax liabilities must be paid within nine months of this date. As a result, your accountant will typically submit your accounts in advance of the nine-month deadline for obvious reasons.
Essentially the Director’s Loan Account is still in credit (£40,000 seed capital) so there is no Corporation Tax to pay. If we had made profits, whether or not we withdrew a salary or dividends, we would be liable to Corporation Tax, which is paid for by PAS Lettings Ltd.
The current rate for UK Corporation Tax is 19% (2017/18). In the 2016 Budget, the Government stated its intention to cut the UK’s rate of Corporation Tax to 17% by 2020 and possibly lower to ease the impact on business of Brexit.
Mortgaging two more properties
Clearly PAS Lettings Ltd wasn’t created just to have one property on its books, but a portfolio, so now is the time to buy and rent two more properties. We’re sticking to Tewkesbury as we know the area, it’s close to the M5, with rail links to Bristol and Birmingham and commutable to Gloucester and Cheltenham with its enormous pool of rental candidates. It’s also much cheaper, desirable and the yields are healthier.
However, PAS Lettings Ltd hasn’t accumulated much income yet let alone enough to fund two new deposits, so I’m going to inject some more capital into the business. This is going to come from my Self Invested Personal Pension (SIPP) as I turn 55 this year and can now access the fund under the UFPLS rules – uncrystallised Funds Pension Lump Sum. You’ll find more and more landlords doing this preferring to invest in residential property for their pensions.
I’ll be taking the lump sums out either side of the tax year to minimise the income tax charge I’ll have to pay on them, but will be raising £110,000 to put into the Director’s Account at PAS Lettings Ltd.
Two properties have been found:
- 3 bedroomed house in Northway, Tewkesbury, Gloucestershire. £192,500
- 3 bedroomed semi-detached house in Tewkesbury, £189,995
Taking on an employee and PAYE
With three properties, PAS Lettings Ltd is now questioning the £275 per month it pays for a full management service. A part-time employee can do an excellent job. A trip down to the job centre and we secure the services of Basil McCartney, 69, a retired builder and handyman on a salary of £200 per month, on a part-time basis with responsibilities to inspect the properties, fix faults and generally maintain the portfolio. He’s agreed to be the first port of call for the tenants when things go wrong. Because of having an employee, we organise the PAYE for Basil and payroll, which the accountant takes care of. Potentially liable for National Insurance.
Increasing income and options
PAS Lettings Ltd is now accruing profit of around £500 per month after all expenses have been considered. It’s decided to draw some dividends from the business and pay these to one of the directors who didn’t contribute the Director Loans into the Director’s Account.
We have a choice of 4 ways of drawing out the money:
- Director’s Loan
Its decided to go down the dividend route and the director will be liable to income tax on these but the amount falls below the £5,000 tax free limit, so no tax to pay.
Re-mortgaging to raise deposit for further property
Tewkesbury has experienced rapid house price inflation and the three properties have increased in value nicely.
- Canon Way – now £170,000 – mortgage of £108,750 – 64% LTV – rent now £675 PCM
- Northway - £220,000 – mortgage of £144,375 – 66% LTV – rent now £795 PCM
- Warwick Place - £215,000 – mortgage of £142,496 – 66% LTV – rent now £795 PCM
The fixed rate period has come to an end on the existing loans. Re-Mortgaging all three properties raises a substantial amount of money which is used to finance a further two properties.
Disbanding the Business
PAS Lettings Ltd continues to trade, more properties are bought and rented and the business is beginning to make a handsome profit. Profits have stayed in the business rather than being distributed as dividends or salary.
The intention of the business was for retirement planning. That day is rapidly approaching. Its 2033 and Paul is approaching his 70th birthday, his retirement. Time to take an income from the business to supplement the State Pension.
The annual profits of the business are not enough to retire on comfortably since most of the wealth of the business is tied up in the equity of properties, which have risen substantially since most were bought in the late 2010’s and early 2020’s.
So, it’s decided to liquidate some of the properties over a period of years but there’s taxation implications to consider.
There is no CGT within a company, instead the company would claim an indexation allowance against any inflationary increase in the property and the gains would increase profits for the year and thus incur a large Corporation Tax bill.
In addition, if we wish to extract some of the money in the form of salary or dividends, we would be liable to personal tax.
Dividends would make more sense as we have the first £5,000 free of tax, then income tax rates according to our tax status.
Death and IHT
At some point, we will both die – they say that death and taxes are the only certainties in life. My will leaves everything to my spouse and 3 children in equal shares i.e. 25% each. PAS Lettings Ltd has 100 shares issued with some owned by my children.
I could put them into an Employee Ownership Trust to avoid taxation, this is very complex and needs professional advice.
Ultimately though, when I die, my shares fall into my estate and become liable to IHT. The value of the shares are connected to the value of the business and will be inherited with an “uplift”, i.e. an increase in value, so there wouldn’t be any Capital Gains Tax to worry about, just IHT. The children still own their shares so can decide what to do with them upon my death, possibly continue to run the business.
Time will tell if Man Utd win the Premier League under Jose Mourinho, but time will not determine company landlords winning the game and providing for their retirement.