Dividends And Other Tax Perks For Landlords Who Incorporate

by Mark Alexander

8:20 AM, 21st March 2019
About 4 months ago

Dividends And Other Tax Perks For Landlords Who Incorporate

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Dividends And Other Tax Perks For Landlords Who Incorporate

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! Dividend Tax For Landlords

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?

Electric cars represent a cleaner, greener way to use everyday transport. But they also offer compelling financial incentives for business and personal purchasers.

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EDITORS NOTE

This article was first published in January 2017 and has since been updated and republished on 21st March 2019.



Comments

Kris Marsh

14:10 PM, 17th January 2017
About 3 years ago

Assuming no other income... Don't forget the personal allowance, and the NI threshold! Quick-n-dirty stab at the figures:

Profit £130,000
- Salary: £8,060x2 = £113,880
Corp Tax 17%: £19,359
Net profit: £110,641
Distribution to each director: £55,320

Per Person:
Salary: £8,060 (no income tax or NI)
Dividends up to Personal Allowance Threshold (£11k-£8060): £2,940 (no tax)
Dividend allowance: £5,000 (no tax)
Dividend at basic rate: £39,320 (7% tax = £2,752)
Total Tax Payable: £19,359 + £2,752x2 = £24,863

Total Income Per Person: £55,320
Tax Per Person: £12,431
Effective Tax Rate: 22.5%

Mark Alexander

9:31 AM, 18th January 2017
About 3 years ago

Reply to the comment left by "Kris Marsh" at "17/01/2017 - 14:10":

Well done!

There are other things that can be done too. I will mention just one and leave some for other people to apply their creative thinking and share ideas.

PENSIONS

A private landlord cannot make pension contributions if rental profit is the sole income. However, incorporated landlords can make pension contributions on behalf of their directors. This not only reduces tax but if the landlord then chooses to invest into commercial property the pension fund can be used to do that if it is the right type. Pension funds do not pay tax at all on rental profit or capital gains and the funds are also exempt from IHT.

Nobody has a monopoly on good ideas 🙂
.

George Harrison

10:29 AM, 18th January 2017
About 3 years ago

What happens if you are not married but live with your co director

Mark Alexander

10:32 AM, 18th January 2017
About 3 years ago

Reader

11:09 AM, 18th January 2017
About 3 years ago

Dear Mark ,

You make 31st January potentially so much more cheerful, your advice is like a belated Christmas present, the least I give away to the HMRC this time of year makes me happy.

As a person frightened of disposing of my millions to a company structure, because I understand companies, you make the whole prospect a little more exciting.

I read that directors loans, payments in kind, National Insurance contributions to Director employees, dividend distributions, the former property owner charging the company for services, can all help reduce an individuals tax burden, Could you give an example of how to mitigate further the double taxation problem?

How could during our life or thereafter we use the company to transfer capital retained in the company? Property is so much better than pension funds that disappear upon death, we retain something to distrubute to the one we care for. The more the better.

Mark Alexander

11:18 AM, 18th January 2017
About 3 years ago

Reply to the comment left by "Reader " at "18/01/2017 - 11:09":

Thank you for your kind words, they mean a lot to me 🙂

I must correct your understanding of pension funds though. They do not disappear on death. Annuities might, depending on their structure, but they are out-dated now in my opinion. A SIPP or a SSAS pension structure which provides income in the form of an AIS (Alternative Income Source) can be passed onto your children tax free. That AIS can include rental profit from commercial buildings.

In regards to other examples, there are several available for free via my Tax Tutorials page - see >>> https://www.property118.com/free-landlord-tax-tutorials/

Bespoke personal guidance is a premium service, please see >>> https://www.property118.com/optimal-tax-planning/91857/ and the many testimonials via the linked discussion thread below.

https://www.property118.com/consultancy-mark-alexander/61522/
.

Ian Ringrose

12:51 PM, 18th January 2017
About 3 years ago

Do not assume that the dividend tax will not be increased, logically it should be set at the level that a computer programmer pays the same tax (including NI) regardless of using a LTD or working as an employee for a consulting company......

Therefore I question landlords putting many properties in a LTD, unless they have high gearing within the LTD.

PS I believe the benefit in kind tax on the Tasla will be less in a few years time........ (Sorry I can't recall when the new rates come in.)

Mark Alexander

14:33 PM, 18th January 2017
About 3 years ago

Reply to the comment left by "Ian Ringrose" at "18/01/2017 - 12:51":

Hello Ian

The new tax rates for electric cars come in 2021.

With regards to the other points you have made, Government has already "leveled the playing field" on dividends. That's why IT contractors are as up in arms as landlords are about section 24. Nevertheless, the outcome is still massively beneficial for some landlords who can incorporate their businesses, just as the example above clearly demonstrates.
.

Kevin Thomson

14:34 PM, 23rd January 2017
About 3 years ago

Mark
impressive....
I can definitely see the benefits in incorporating, but my accountant is not overflowing with enthusiasm at the prospect. Potential issues (no doubt covered in other articles by you before?) are:

'An actual tax ‘partnership’ arises where there are substantial (my emphasis) property-related activities performed by each person, and usually several persons, and this goes far beyond a simple joint ownership of several properties. I would not accept the assertion that merely adding your wife or children (when they are 16) to title deeds or applying for a partnership UTR would satisfy this. Has it been tested at tribunal? Do Property118 have a legal opinion by a QC on this? Is it applicable to Scotland (where, remember, no Tenants in Common, Declarations of Trust or Beneficial Interest)? If, after you pay for your personal consultation and your professional adviser, what insurance or backup is provided if HMRC challenge this form of planning (as they will)? These are the questions you need to ask.

Some background. Property developers, hoteliers, etc., acting jointly will generally be accepted as being in partnership. But for those who merely let property, HMRC seizes on their Property Income manual (at PIM1030) in relation to jointly-owned property letting businesses: ‘Joint letting does not, of itself, make the activity a partnership. Usually, there won't be a partnership.’

‘Whether or not a taxpayer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the taxpayer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the taxpayer is one of a group of joint owners who let the jointly owned property, and provide significant additional services in return for payment’.

The last point is often interpreted that HMRC wants to see gardening, laundry, or similar, for which a tenant might be prepared to pay extra which is, of course, unusual in mainstream property letting. Where I agree with Proeprty118 is that undoubtedly some joint landlords, actively managing a property portfolio with sufficient commercial organisation e.g. dealing with tenants, chasing debts, managing repairs, etc., in order to realise their primary income, may well, in the next few years, be tempted to argue that they are in fact in property partnerships. If I were you though, I would await legal judgements on that before proceeding.'

as i say, you have no doubt covered most of these points before elsewhere, but if you have anything else to add,I'd be interested to hear it.

thanks
Kevin Thomson

Mark Alexander

15:38 PM, 23rd January 2017
About 3 years ago

Reply to the comment left by "Kevin Thomson" at "23/01/2017 - 14:34":

Hi Kevin

The BICT structure is not currently available in Scotland.

The other points you have raised have been tested. Counsels opinion together with references to case law and legislation are all cited in my tax tutorial entitled "Understanding incorporation and the various costs, benefits and tax relief available". That tutorial, along with many others, can be downloaded free of charge via the link below.

LINK >>> https://www.property118.com/free-landlord-tax-tutorials/

All the best

Regards

Mark
.

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