Can a company buy a house for a director?
If you’re investigating whether a company can buy a house for a director, your best recourse will always be to consult a legal professional first.
That said, here is a thorough grounding in the basic situation when it comes to companies buying residential property for their directors and employees:
Can A Company Buy A House For A Director?
Yes, a company can buy a house for one of its directors. However, the process of doing so – and, critically, the associated tax implications – are by no means simple or beneficial.
This isn’t an accident. The idea that a director or shareholders in a firm could buy personal property to avoid paying tax is not a new one. This means the law is set up to prevent it and penalise people and companies who do.
The key determinant of whether this will be a beneficial idea or not is often whether the purchase will attract what is called a “Benefit In Kind” (BIK). This is a situation where a director is receiving a benefit from the house, such as:
- Living in the accommodation themselves
- Having their family or dependents living in the property
- Letting any non-qualifying person (anyone with a familial connection to the company) occupy the property
Companies Buying Residential Properties And Tax
The goal of most people who are interested in whether companies can buy a house for one of their directors is the possibility of paying some degree of reduced tax by doing so.
The difference is usually between paying corporation tax (19% at time of writing) or a combination of Income Tax, Capital Gains Tax, and National Insurance Contributions (which can be much more).
The theory often imagined is that because a company is a separate legal identity from its owners, the property will be owned by the company and any rental income will be taxed at the corporate tax rate instead of the often higher Income Tax rate.
Unfortunately for those with this idea in mind, the reality is that this is rarely an advantage to a director living in the property. They are deriving a Benefit In Kind in the form of accommodation. The only exception would be if the director derived no benefit. For example, if the company rented the property to them at a fair market rate.
There are also additional tax rules for companies buying residential properties over £500 000 in value:
1) Stamp Duty Land Tax (SDLT)
If a person with a connection to someone who is part of the company (these are those non-qualifying people mentioned previously) lives in the property in the three years after purchase it will be subject to a special rate of SDLT.
This is charged at 15% of the property price when it is purchased. Even if the person living in the property is intending to pay a fair rent (as established by the local market), this cannot be avoided.
Any company in the UK that’s purchasing residential property is likely to need to pay this higher rate. This remains true even if the company is intending to develop the property and sell it on for a profit.
2) Annual Tax on Enveloped Dwellings (ATED)
SDLT is a barrier for the first three years after a property has been purchased by a company. Annual Tax on Enveloped Dwellings, on the other hand, remains in effect throughout the time that a property is owned. ATED is:
- Charged annually and in advance – this tax is levied every year and is paid a year in advance.
- Based on property value – this means it runs to several thousand pounds every year.
- Penalised harshly if not complied with – the fines for not paying ATED are significant and not to be risked.
How Else Could A Company Buy A House For A Director?
There are some other slightly more indirect options for a director who wants to explore their options when it comes to having their company buy a house for them. These include:
- Have the company loan them money – a company can lend money to a director. They can then do as they please with it. This would only attract a BIK if the director was paying less than a fair market rate of interest on the loan. Some companies do have articles of incorporation that prevent this though.
- Have the company pay dividends – a company can give the director a dividend payout. The director could then use this to purchase the property.
- Carry out a share buy-back – this option has received a great deal of negative press but remains an option for directors who are also shareholders. The company can buy out the director’s shares, giving them funds. However, Capital Gains Tax may be payable.
This is not to say that any of these options are sensible ideas in any particular case or that they will be beneficial – or even legal – depending on individual arrangements. That’s why it’s always vital to seek out expert legal advice whenever you are wondering whether a company can buy a house for a director.
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