How can using a company to buy a home be tax efficient?

Old planning

Using a company to buy the shareholder’s home was once relatively tax efficient, despite it counting as a taxable benefit in kind. Generally, the tax and Class 1A NI liabilities were modest. This meant company ownership of homes became sufficiently popular that the government introduced higher rates of stamp duty land tax (SDLT) etc. and a new tax, the annual tax on enveloped dwellings (ATED), to dissuade the practice.

SDLT and ATED

If a participator’s company buys a home for them, a higher rate of SDLT of 15% applies if the property costs more than £500,000. On top of this the company will have to pay the ATED for any year in which it owns a dwelling worth £500,000 or more. The ATED starts at £3,800 (for 2022/23) and goes up to an eye-watering £244,750 for very high value properties.

If the company is registered overseas, a further 2% SDLT charge can apply.

Capital gains tax

Another significant disadvantage to the company buying and owning the home is that when it’s sold the capital gains tax private residence relief won’t apply. That means the company will have to pay corporation tax (CT) on the full amount of any profit (capital gain) it makes. Additionally, indexation relief ceased to apply to company-held assets purchased after 31 December 2017.

A special higher CT rate of 28%, instead of the usual 19%, applies to the gains made by companies from the sale or transfer of residential properties.

Alternative strategy?

Unless there are non-tax factors at stake, or the property is unlikely to ever reach the value where the ATED applies, getting a company to buy the home is unlikely to be tax efficient. However, there’s an alternative way the participator can use the company’s money to help with the purchase of a new home.

Instead of borrowing from a high street lender the cash-rich company can lend the money interest free.

Tax consequences

The loan counts as a benefit in kind but the tax is relatively modest. The amount on which the participator will be charged is currently 2% of the average loan balance over the tax year. So, if the balance is, say, £250,000 they’ll be taxed on £5,000. As they repay the loan the amount on which they are taxed reduces. This could be avoided by paying the company interest of at least 2% (the official rate of interest), which might be cheaper than a high street lender anyway.

In addition to the tax on the benefit in kind there’s a one-off tax charge for the company, equal to 33.75% of the loan. However, it’s a temporary tax which HMRC will refund each year that the balance of the loan reduces. At current rates the interest the company would lose from having to pay this bill would be minimal, though this of course is subject to any further increases that may be announced.

If the participator combines a mortgage with a loan from the company, they could consider making the mortgage interest only at first. That will reduce the income tax for them and accelerate the refund for the company’s temporary tax charge.