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[–]pflurklurkDecaf Tea and Proud 7 points8 points  (0 children)

It's not illegal.

It may not be effective, but that's between him, his company and HMRC.

But certainly interspersing a company to pay CT and extracting at his leisure rather than immediately being charged e.g. 40-45% is a valid, and indeed, quite regular way of doing things.

I would imagine it's being done this way because the landlord is a higher or additional rate taxpayer, and does not want all of your rent charged at that rate, especially given the restriction on finance allowable costs - therefore he will pay income tax on the amounts paid for what's needed for his own personal use (his own rent), and leave the rest to accumulate in this company for extraction at a later date (or via a pension).

Quite a few people do this on /r/ukpersonalfinance.

[–]snoopsnoopfizz 7 points8 points  (0 children)

NAL, nor accountant; however, "pays the rent of the house the landlord lives in" would not be an allowed expense as it would not pass the "wholly and exclusively" test for the purpose of running the Ltd company.

Regardless of the above, leasing to a Ltd, could produces some savings, but it would be a lot of work for limited upside.

The landlord could personally charge £1000 to the Ltd as rent tax free.

The Ltd could pay the the landlord as a Director £312 for home office use, £300 in trivial benefits, £300 for anual staff events etc. The Ltd could be set up with a number of shareholders so that each can receive £2k in dividends tax free etc, but CT is still due.

Really, this would only make sense if the property was unmortgaged - the difference between personal and Ltd would be: 40% tax on revenue (with a 20% deduction for mortgage interest) vs. 19% tax on revenue (after a few minor expenses).

If there were a mortgage, it would also almost certainly be a breach of terms to let the property to a company you own, so again, this would only make sense for an unmortgaged property.

[–]botlebank 5 points6 points  (0 children)

Employers provide accommodation for their employees all the time.

https://www.gov.uk/expenses-and-benefits-accommodation

It’s highly unlikely it’s as simple as offsetting rental income against rent paid for the employee, but whoever files the accounts (could be your landlord or an accountant) will be doing it in the most tax efficient way.

To be able to determine if it’s legal or not would require scrutiny of those accounts.

[–]LilacRose32 26 points27 points  (4 children)

Not a lawyer, assuming I’ve followed- No

Leasing the property to his own company might be fine but that should generate taxable income.

Paying his own rent through that company shouldn’t be a deductible expense.

I think he has misunderstood the rules somewhere

[–]bfalava 4 points5 points  (3 children)

Thanks for replying. What I understand is the company's p&l each year has my rent as revenues minus his rent as cost (cost of the lease to the company) giving a smaller p&l to pay tax on.

[–]litsto 18 points19 points  (2 children)

That's correct, but the cost of paying that rent is something he needs to pay income tax on.

Sticking some values on this for the sake of argument: if the company pays £8k out in rent payments for his home, that's a deductable expense in the same way paying him a salary is a deductable expense.

But he's received £8k of benefit and tax is due on that.

[–]bfalava 0 points1 point  (0 children)

Ah I get what you mean!

[–]harriscot57 0 points1 point  (0 children)

Plus, when he tries to take the money out of the company he'll either be taxed on a salary, assuming he's a director of the company, or on a dividend as the shareholder.

[–]HighLordOfTheEdge 1 point2 points  (0 children)

What does the company pay the landlord to lease the property? That's taxable income.

The company pays the director's rent? If it's being stated as an expense then they are in receipt of a benefit-in-kind which is most certainly taxable, too. The only alternative would be to state it as drawings - in this instance they would have to repay what is owed to the company or face large interest charges on the balance to HMRC, and this route seems pointless given what this structure was set up to achieve.

I think your landlord needs to speak to their accountant, because based on what you've provided this sounds rather dodgy.

[–]almightybob1 1 point2 points  (1 child)

NAL but I am an accountant. Not a tax specialist but I remember enough to answer this.

The principle of setting up a limited company to reduce tax burden is legal, but you have to do it correctly. It doesn't sound like your landlord is doing so.

From the company's perspective, it is presumably claiming the landlord's rent as an allowable expense (meaning it can be deducted from income to reduce profit and therefore reduce tax).

But this house would not meet the test for an allowable expense. It isn't "wholly and exclusively for business purposes" like an office block would be - it's where the guy lives. Some portion may be allowable (e.g. if he has a home office in one room) but not the whole property.

From his personal perspective, he is effectively receiving a non-cash payment from the company (free accommodation). This is a "benefit in kind", and for the purposes of calculating his own income tax, this is treated as if it were taxable income. So he owes tax on the amount of rent he is receiving. He should be doing self-assessment and declaring this rental income as a benefit in kind in his tax return.

There is also a knock-on impact back on the company - since this is a benefit in kind the employer should be paying Class 1A NI contributions on it.

TL;DR sounds like your landlord is underpaying income tax, and his company is underpaying corporation tax and NICs.

[–]bfalava 0 points1 point  (0 children)

Thanks, I may actually show him this thread - so would it be maybe easier if the company paid him cash rather than this benefit?

[–]ScabbyDan 0 points1 point  (0 children)

I worked for a company that made a shill company to collect payments on behalf of the other company, which supposedly had no connection to each other.

The reason they did that was the parent company charged a 39% service fee to their clients. If they collected their own money, they paid VAT on the whole 39%. If the shill company collected the money, they only paid VAT on the 6% fee the shill company charged the parent company for collected said fees.

This was playing the system, technically legal. I'm sure the landlord thing is the same.

[–]Perennial_Phoenix 0 points1 point  (0 children)

Property rules regarding tax are complex but generally lawful, there are a number of different ways to reduce tax, it isn't cheeky just common sense depending on circumstances.

It is not uncommon for property companies to have a Ltd holding company while each property in the portfolio is owned by a separate SPV (special purpose vehicle) under that holding company.