Recording the purchase of a property by your business

This article will show you how to record the purchase of a property by your business and any corresponding mortgage.

If you have an unincorporated landlord account type, find out how to add a property in FreeAgent so that you can record rental income from it. Keep reading if you want to find out how to include the purchase and corresponding mortgage for the property in your accounts.

Please note:

  • This article is only relevant if you have a limited company account type, or you have an unincorporated landlord account but want to include the property purchase and corresponding mortgage in your accounts as well as the rental income.

  • FreeAgent supports FRS105 accounts for micro entities, which doesn’t allow property revaluations. Also, if the company receives income from a property, the CT600 in FreeAgent does not support box 190, where you would need to report the company’s property income. If either of these apply to your company you would need to file the accounts and CT600 outside of FreeAgent.

  • You’ll need full (level 8) access to FreeAgent to follow the steps below.

A property that is owned by the business would normally be recorded as a capital asset that doesn’t depreciate.

There are two ways to record a mortgage for the property purchase. You can either create a new liability category or add a dummy bank account. If your business is registered for VAT, the dummy bank account approach may be most suitable. However, if you’re unsure which method to use, please ask your accountant.

Method 1: record the mortgage using a new liability category

If your business is not registered for VAT, you may want to record the mortgage for the purchased property using a new liability category. You’ll also need to add a capital asset account and create journal entries.

1. Add a new liability category

First, you’ll need to add a new liability category for the mortgage.

01.png

When you create a new liability category, it will appear under the 'Other Money In' and 'Other Money Out' drop-down menus when you're explaining a bank transaction.

2. Add a new capital asset type

You’ll also need to add a new capital asset type for the purchased property.

02.png

When you add a new capital asset type, new accounting categories will be created automatically for the purchase, depreciation and disposal of any assets in this type.

That means you’ll see your new asset type in the drop-down menus when you explain the purchase or disposal of a capital asset in the future.

3. Create journals to record the mortgage liability and property cost

Next, you’ll need to create the following journal entries to record the property cost and the mortgage liability:

  • Debit code (account number) ‘602 - X’ with the total cost of the property, if the property is allowable for the annual investment allowance (AIA) or other capital allowances that are available for your FreeAgent account type.

    If the property is not allowable for capital allowances, you should debit account number ‘601-X [asset type] Brought Forward’ with the total cost of the property, using the appropriate capital asset type, to keep the asset out of the tax calculation.

  • Credit the new liability category with the total cost of the property or the mortgage amount.

    If a deposit has been paid towards the property cost out of a director’s personal bank account, you can exclude the deposit amount from the credit entry above, and add the deposit amount as a credit entry to the director’s loan account (code ‘907’).

    If a deposit was paid out of the business bank account, you can explain the transaction to the new liability category (under 'Other Money Out'), which would reduce the total mortgage balance.

If you’re unsure which journal entries are required, please ask your accountant.

If you follow these steps, the transactions will not appear on the VAT return. However, if you wish to add them into box 7 only, you can adjust boxes 6 to 9 of your VAT return.

Method 2: record the mortgage using a dummy bank account

If your business is VAT registered, you may want to record the mortgage for the purchased property using a dummy bank account to include the transaction on the VAT return.

1. Add a new capital asset type

First, you’ll need to add a new capital asset type for the purchased property.

03.png

When you add a new capital asset type, new accounting categories for the purchase, depreciation and disposal of the asset will be created automatically to keep track of the asset.

You’ll see your new asset type in the drop-down menus when you explain a purchase or disposal of a capital asset in the future.

2. Add a dummy bank account for the mortgage

Next, add a dummy business bank account to represent the mortgage. Give it a suitable name such as ‘Mortgage’.

04.png

3. Add a manual bank transaction to record the property cost and the mortgage liability

Then, you’ll need to add a manual bank transaction in the dummy bank account to record the property cost and the mortgage liability.

Choose ‘Payment’ from the ‘Type’ drop-down menu, ‘Sundries’ as the ‘Category’ and apply the appropriate rate of VAT. This transaction will be included on the VAT return unless you select it to be ‘Out of Scope’ of VAT.

05.png

If a deposit has been paid towards the property cost, you can explain the transaction from the business bank account as a transfer to the dummy mortgage bank account.

However, if the deposit was paid out of a director’s personal bank account, you can add another manual, 'Money In' transaction in the dummy bank account from a director’s loan account. Either of these transactions (paid by the business or paid personally) would then reduce the total balance in the mortgage dummy bank account.

4. Create journal entries to move the cost to the capital asset category

Next, you’ll need to create the following journal entries in order to move the amount out of the Sundries category and into your capital asset category:

  • Debit code (account number) ‘602 - X’ with the total cost of the property if the property is allowable for the annual investment allowance (AIA) or other capital allowances that are available for your FreeAgent account type.

    If the property is not allowable for capital allowances, you should debit account number ‘601-X [asset type] Brought Forward’ with the total cost of the property, using the appropriate capital asset type, to keep the asset out of the tax calculation.

  • Credit ‘280 - Sundries’ with an appropriate description.

If you’re unsure which journal entries are required, please ask your accountant.

What happens next?

After following these steps you should see that the property cost and the mortgage liability have been recorded on the Balance Sheet report.

06.png

If you also need to account for stamp duty and legal fees, you might be able to include these in the total property cost or you can set up a new category for it. If you're unsure, please ask your accountant.

Did you find this article useful?