8:20 AM, 21st March 2019, About 3 years ago 27
I hear a lot of talk about double taxation for private landlords who decide to incorporate. However, when I explain that a husband and wife could withdraw £100,000 a year between them from their company and pay less than half the amount of tax as individual landlords that tends to get people thinking a bit more. That’s after factoring in the corporation tax and tax on dividends by the way!
I modeled how this might look for a couple with a rental property business based on two options, i.e. staying as a partnership and suffering the full effects of the changes to mortgage interest relief vs incorporating. The figures I used are:-
• Gross rental income of £330,000
• Mortgage interest £100,000
• Allowable expenses £100,000
• Net profit £130,000
Note that ‘allowable expenses’ can include Directors salaries. Assuming the Directors have no other income, they can each earn £162 a week without paying income tax or National Insurance. Furthermore, there would be no employers NIC’s to pay at this level.
As of April 2019 the basic rate tax band will only apply to earnings over £50,000 and on three occasions, two different Chancellor’s have said that corporation tax will be reduced to 17% by the 2010/21 tax year. Let’s assume that nothing changes in that regard.
If the business was incorporated and £43,756 of the net profit was distributed in the form of dividends then each shareholder would receive the first £2,000 of dividends tax free and pay only 7% dividend tax on the other £41,756. In other words, they would each have to pay £3,131.70 plus the company would pay £17,000 of corporation tax on it’s profits. The total tax payable would be £22,263.40.
However, as private individuals they would pay tax of £53,000.
This is because the £100,000 of finance costs will be added to their taxable income if they remain as individual landlords. Their taxable income would then be £230,000. A tax credit of 20% of the mortgage interest would then be deducted from their tax bill, thus reducing it from a total of £73,600 to £53,600.
Now what would you rather pay, £53,600 or £22,263.40?
Now let me put it another way; the increased amount of money available for Directors personal spending would be nearly £20,000 a year more after paying all due tax under the Limited Company structure when compared to making no changes and continuing to pay tax as individual landlords. Also note that in the example I have created, the company would also be retaining some of its profits. This can be saved for a rainy day, used to pay down mortgages or for further investment.
Alternatively, the Directors might want to treat themselves to a new Tessla, or in fact any other electric car!
The entire cost of electric cars can be offset against the company profits and the tax on the “benefit in kind” is just 7% of the value of the car.
I read and hear so much negative commentary in regards to “double taxation” when it comes to incorporation and extracting money in the form of dividends and I am shocked at how few people have actually thought this through.
Perhaps they don’t want to halve their tax bill and have the option to drive an eco-friendly, 4 door, 4 wheel drive supercar that can do 0-60 faster than a Lamborghini?
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This article was first published in January 2017 and has since been updated and republished on 21st March 2019.
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