There are a couple of things that you will need a credit card for – usually paying for the mortgage valuation is one such cost early on in the buying process.
A newly formed company will unlikely be able to get a company credit card initially – it has no credit history. income or assets!
Also, most property investors don’t have enough money so 0% balance transfers get used a lot. Some investors will be juggling up to 6 or so credit personal credit cards!
That’s a lot and there are a few things you need to know about personal credit cards.
Acorn clients
Anything not in your property or company bank account needs to go on the Naughty List. The down side of using credit cards is that you will have to spend a little more time keeping this Naughty List up to date.
Essential clients
Our golden rule with regards to Receipt Bank is that you only submit and invoice once you have paid for it. If we see an invoice in Receipt Bank with no corresponding value in the bank statement, we’ll know it was paid for personally by the director.
How it was paid is irrelevant!
It could be credit card #1 or credit card #2 or from your salary or from what you found scratching behind the cushions on the couch the night before. It really doesn’t matter! I promise!
Credit card fees and interest charges
Most cards have an annual fee and if you don’t settle the balance in full, you will pay interest on the balance outstanding. These are allowed as a business cost – but only in 1 very limited circumstance:
The credit card must be used wholly and exclusively for your property business!
It cannot have any person expenditure on there. If you pay 69p for a postage stamp to mail a Christmas card to your mate then there the credit card no longer meets the “wholly and exclusively” test – and the fees and interest are no longer deductible.
Top tip
Put a sticker on the credit card so that it is clearly labelled.
Where you have more than one entity (e.g. property in your own name and property in a company then make sure this label clearly indicates which card is for which entity!)
Be disciplined, be organised and as far as possible, stick to using the right card for the right entity.
What if cash is tight?
If cash is tight and personal expenses are incurred, or there is cross contamination between entities on a credit card, then you will lose the right to claim the annual card fee or the monthly interest.
Where cash is tight, this becomes less of an issue and just having enough money to pay the builders and the mortgage company far outweighs the tax advantage of claiming some minor fees!
Acorn clients
Where you have been disciplined with your card usage and pass the “wholly and exclusively” test, you will need to include the interest and fees on your Naughty List.
Essential clients
It is best you take a photo of your credit card statement showing the interest and annual fee and submit that to Receipt Bank as and when you open your credit card statement.
Let's get technical now
Imagine you have purchased some blinds online for say £100 using your personal credit card.
The invoice is submitted to Receipt Bank and we don’t see £100 leaving your company bank account. As a result, the £100 expense goes into your Xero accounts as an expense and instead of the bank being affected (and going down), your directors loan account is affected (and goes up – the company owes you money).
There is now a debt owed by the property business / company to you for £100 that you spent on the blinds.
At month end, your credit card company wants to be paid. You can then go to the property business / company and take the £100 in settlement of the debt it owes you. The property business / company will now no longer owe you this money – and the bank account will have gone down.
You now have in your hands the money to settle the card. The bank account has gone down – which is what would have happened if you had used it to buy the blinds in the first place. The debt to you has been paid off so nothing is owed there – and the credit card is paid off in full!
Also have a look at our blog on directors’ loan accounts
