Question about "drawings"

No, not necessarily.

Rob Graham

Must have been in Mogga-speak....!! With respect, your post makes no sense. Which bit did "someone post elsewhere"? The bit above or the bit below? And you are - or someone is - muddling self-employed drawings and dividends.

not necessarily.

not necessarily.

No - not necessarily.

Look here, Mogga. You *MUST* make clear which bit is quoted and which is your own addition. You *SHOULD NOT* top-post, but I suspect on this occasion you have, though it's impossible to be sure.

If you did top-post, then the bit at the bottom, referring as it does to dividends, suggests the poster was talking about a limited company, hence your comments about the self-employed are out of place.

The self-employed do in deed pay IT/NI on their profits irrespective of whether they have been withdrawn from the business.

Company owners (shareholders) do pay income tax on dividends they extract from a company (if the sums involved are large enough and at 100k they would be). In addition, small companies (used to) have to pay top-up CT on after-tax profits distributed as dividends to individuals. This has been abloished but I suspect there might be nasty implications relating to retained old profits from when the tax was in force.

"The self-employed don't pay income tax nor NI (nor CGT) on amount(s) withdrawn (called Drawings) from any business (not just BTL). They pay tax on the profits of the business whether withdrawn or not.

I hope that clarifies the position for you."

Someone's posted this elsewhere and it doesn't make sense to me. ^^^

This bit I wrote: I know you pay tax on profits and can take dividends out and under certain levels you can not have to pay tax BUT if you took 100k out of a business you'd have to pay some tax on it?

It was in a discussion about BTL. And well to be honest if its true then if my company invested in a BTL and then remortgaged and took out the equity of the house then would that be FREE money? I'd have to pay the mortgage back I know but the cash I'd withdrawn as equity - could that be tax free in my pocket?

Aha! That puts a completely different light on the matter.

If you take 100k out of a company *and the money represents dividends* then you will have to pay some income tax on it. But if you had previously *lent* money to the company, then taking it out again would not represent income to you, so no tax due.

EITHER: This is a loan from the company to you, so does not represent income to you (you have to pay it back to the company so that it can pay it back to the mortgage lender). Hence no income tax due, but there are rules against directors loans and I don't know what the consequences of breaking them are - could be that it would thene be treated as though it were income after all.

OR (and this is what I think you mean): The company already owns the property either fully or with a small mortgage loan the size of which you are proposing to increase. You fully own the company, and hence indirectly you own the equity in the house. Your shareholding in the company is basically worth the equity in the house. If the company liquidates some of this equity you can withdraw it without it counting as income. Hence no income tax.

But there is a snag. If this were an ordinary letting business not wrapped up in a company, you would be drawing money out of the business (reducing the value of your capital account, without overdrawing it) and there would be no tax implications whatever. You'd simply be taking out money which is yours already.

But as there is a company wrapper around it, what you're really doing is cashing in some of your shares in the company. If these shares are worth more now than they were originally, then you have made a capital gain on those shares which you are liquidating. This would be taxable.

So if I as a sole trader not a ltd company buy a house with a mortgage of 30k (because I've found a real bargain taht sells way under what its worth) Then take the equity out worth say £100k then I now have a mortgage for £130k but can go and spend that £100k without any tax implications at all?

If I then sold the house for the amount owing on the mortgage have I just made £100k tax free or is then capital gains payable? OR if I go bankrupt having spent all the cash have I had the fun of spending £100k with no tax?

So if I could find a cheap house to buy and remortgage to take out excess equity then I could live v well and not pay tax? (which would explain why the world and his wife are BTL'ing)

Thanks for your long reply. Tis appreciated.

Correction: Not "sole trader". You would buy the house in a personal capacity. In a BTL context, letting is not a trade. It would be a trade if the purpose of the purchase were to do it up for re-sale.

Yes. Well, almost. If by so doing you overdraw your capital account, then you would lose the ability to set mortgage interest on part of the loan against rental income for the purpose of computing your liability to income tax. But if not, then you're OK.

Example 1: You buy the house for 130k using 100k of your own money plus 30k mortgage loan. It then transpires (you cunningly knew this in advance) that the house is really worth 200k and you up the loan to 130k, and take the 100k back. Here your capital account would not be overdrawn, it stood at 100k to start with (the money you put up when you bought), and you've drawn the 100k out again. This is your own money back. No tax implications. Mortgage interest on the full

Example 2: You buy house for 40k using 10k own money and 30k loan. It's really worth 200k and you up the loan to 130k as before and take

CGT liability would arise. It doesn't arise until you sell though.

So after sitting tight for a bit longer, you sell it for 250k and are left with 120k in the till after repaying the 130k loan. For simplicity I've left buying/selling expenses out of the picture. But you have now realised a 210k gain and so up to 84k CGT is due on this. That's OK, though, since there is 120k in the till and you've had your 100k you've already spent, plus another 36k with which to pull your next scam.

But suppose you don't hang on, and sell straight away for 200k, you've now got 70k in the bank and have realised a gain of 160k with up to 64k CGT liability. You're still OK, with 6k breathing space.

But suppose you had increased your borrowing to 150k instead of 130k, and taken out 120k high-life money instead of 100k. Now there'd be only 50k in the till with which to pay a 64k tax bill. So you had better have 14k left from your 120k.

If you go bankrupt the house will be sold and CGT liability will still arise. :-(

Well yes, but you can't go on taking out equity forever unless you expect never to sell and pay your CGT bill. And what if prices drop? Equity can go down as well as up.

In message , mogga writes

Yes, until the house is eventually sold when CGT will likely need to paid on the whole gain from when you bought it. The danger is that you have withdrawn so much equity in the meantime that there is insufficient equity left to pay any CGT.