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What kind of property company do you need?

Uncategorized Feb 10, 2020

THE QUESTION

Our visit to our accountant had an unanticipated outcome.  We wanted answers to somewhat we saw as basic questions.

What kind of company do we need (LLP or LTD) in order to buy a commercial property and use it as serviced accommodation (plus rent out the shop underneath)?

Can we operate under one company only if we develop a mixed portfolio of R2R SA, buy-to-let and commercial conversions or do we need an SPV for each?

It quickly became clear that he knew even less than us about property investment so, back to the drawing board!

THE ANSWER

Your experience with accountants is quite typical I think, at least when you talk with 'generalist' accountants.  This highlights the importance of finding a property specific accountant.

Why? Because they will understand the nuances of property with respect to taxation in a way that generalist accountants cannot.  Not only will they be able to give you the guidance you seek on how to set yourselves up, but they know the nuts and bolts of what you can and cannot offset against tax.

Another factor in choosing your accountant should be that they also invest in property.  This added dimension will do away with the need for you to explain what you are trying to achieve.  They get it already because they invest too.

How you structure your property business has two sides to it

  1. How it is taxed
  2. How it borrows money

To get the balance right you need to take into account both facets.  If you focus on one, while ignoring the other, you will be saving money in one area, but costing yourself money in the other.

From the lending side, if you set up as an LLP, you will be shutting down possible lending options, as mortgage lenders tend to favour the limited company structure over an LLP.  So if you are advised that an LLP is more tax efficient, you may well give back some of the tax you will save in increased mortgage costs.

Accountants sometimes guide you down the route of establishing an overarching holding company, with multiple subsidiary companies underneath it as being a very tax efficient structure.  Doing this will really shoot yourselves in the foot borrowing-wise.  Mortgage lenders distinctly dislike this structure and here's why:

The holding company can pull the strings of its wholly owned subsidiaries and this is what lenders fear.  Subsidiary A is the company with the mortgages and the danger lenders see is that Subsidiary B gets into financial difficulty and, to keep it afloat you (through the holding company) syphon off money from A to B.  Now Subsidiary A, starved of funds, cannot keep paying your mortgages and goes into arrears.

This is why lenders predominately decline to lend to this type of company structure.  Which means that any tax advantages are inevitably marginalised.

Having multiple companies is fine, if that is what your accountant advises, but they should be in a flat structure with you being the shareholders of each, rather than your holding company being the shareholder.

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