Shelter’s Income and expenditure figures highlighted13:57 PM, 4th February 2019
About 2 weeks ago 35
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 will be able to take £100,000 of dividends between them by 2020 and only pay a total of £6,300 in dividend tax that begins puts things into perspective.
OK, their company will also pay 17% corporation tax on it’s profits but when you compare the overall effective tax rate to the alternative of keeping everything in private ownership the difference can be massive.
I modelled 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
On three occasions, two different Chancellor’s have stated that by the year 2020 the higher rate income tax band will start at £50,000 and that corporation tax will be 17%. Let’s assume that nothing changes in that regard.
If the business was incorporated and £50,000 of the net profit was distributed in the form of dividends then each shareholder would receive the first £5,000 of dividends tax free and pay only 7% dividend tax on the other £45,000. That assumes they have no other taxable income of course. In other words, they would each have to pay £3,150 of tax after paying 17% corporation tax on their profits of £22,100. The total tax payable would be £28,400.
However, as private individuals they would pay tax of £53,600.
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 £28,400?
If more profit is made this can be retained in the company for a rainy day, used to pay down mortgages or for further investment and only the 17% corporation tax would be payable on the additional profit. Alternatively, the Directors might want to treat themselves to a new Tessa!
The entire cost of the car 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?
More Tessla ownership benefits explained below the Tax Planning Booking Form.
PS – here’s a link to an article where I explain why I think rental profits will rise significantly over the next few years – LINK
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