Dividends And Other Tax Perks For Landlords Who Incorporate

Dividends And Other Tax Perks For Landlords Who Incorporate

8:20 AM, 21st March 2019, About 3 years ago 27

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


Kevin McLandlord

21:00 PM, 24th January 2017, About 6 years ago

Hi all.

I own a Ltd company that has only one rental property inside at the moment. I have one in my own name that I'll be looking to shift into the Ltd company when possible.

I aim for another 8 in the next 5 years through my full time job. Idea is to make this my sole focus by the time I have 10 (we will see!).

With regards to what you've posted about getting a company car within the Ltd company, I was informed that you are taxed differently with a company car within a property business.

I currently have a company car from my full time job (marketing) so understand the tax etc.

Are you saying it's no different within a property company? Even if you only use it every now and then?

Look forward to your thoughts.

Ian Ringrose

10:07 AM, 25th January 2017, About 6 years ago

When any company provides an employee with a company car, the company has to make large NI payments on the car, and also can’t offset most of the cost of the car against company tax (in addition to the personally tax the employee has to pay on the car) – unless it is an electric car……

The 45p a mile you can claim tax free for using your own car for work (visiting your properties), is also more than it costs most landlords to run a car.

Hence it is very unlikely that a landlord would benefit from having a company car from their own property company. The car Mark chose to use as an example is likely to be the most tax effective make and model of car to do it with.

HOWEVER, unless YOU put a value on having THAT car that is a lot more then I do, it would be saving tax for the sake of it, instead of paying a lot less for a car, and paying a little more tax. So do you wish to pay £xx,xxxx for a car instead of £xxxxx so as to save £yyyyy in tax?

Mark Alexander - Founder of Property118 View Profile

10:11 AM, 25th January 2017, About 6 years ago

Reply to the comment left by "Ian Ringrose" at "25/01/2017 - 10:07":

As I said in my original post Ian ...

"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?"

The point is, some want both!

Ian Ringrose

11:24 AM, 25th January 2017, About 6 years ago

Agree Mark, the issue is that Kozie (and I assume lots of other people) don’t understand how clever you were being with your choose of car and assumed you were saying a company car was good option for all landlords with properties in a ltd. You choose one of the few cars currently on the market that could get me to consider having a company car……

Mark Alexander - Founder of Property118 View Profile

11:49 AM, 25th January 2017, About 6 years ago

Reply to the comment left by "Ian Ringrose" at "25/01/2017 - 11:24":

I have to admit to being ever so tempted too.

However, I'm not so convinced that a Tessla would be a good choice of car for a resident of Malta LOL

Ian Ringrose

12:06 PM, 25th January 2017, About 6 years ago

Not bad for an overpriced milk float…… Just wait until the M3 ships!

Graham Bowcock

10:07 AM, 22nd March 2019, About 3 years ago

There are some further benefits of incorporating.

Firstly, you can easily involve other people simply by the sale of shares; the ownership of the property stays the same. My accountant bought into one of my portfolio companies in 2000 and has had a healthy return on his investment; as he is of retirement age we have a plan to sell the shares to me and my wife, but it can be done over time to mitigate his CGT.

Secondly, we have passed shares in one company to our son at university. He can be paid a dividend and as he has no other income this can be up to £13,500, or so, each year tax free. If I were to give him that myself, I'd have to earn about £25,000. I have two other teenagers, so overall the annual saving will be significant. To help matters we have what are termed alphabet shares so we do not all have to have the same dividend.

We have a good tax accountant!


Mark Alexander - Founder of Property118 View Profile

10:24 AM, 22nd March 2019, About 3 years ago

Reply to the comment left by Graham Bowcock at 22/03/2019 - 10:07
Thanks for your comment Graham.

I always tell people, good accountants are not those who charge the least, it is the those who save you more than they charge.

The role of the team at Property118 is to deal with the legal aspects of restructuring. We do not get involved with the ongoing accountancy, but we are always happy to recommend a good property accountant.

Tim Jones View Profile

7:36 AM, 23rd March 2019, About 3 years ago

In the last 8 months I have bought 2 properties out right with no mortgage which I have put into a new company structure. I have done this with a personal loan (via a recently set up large mortgage on my family house as it was such a great rate) I am taking monthly loan repayments from the property company. Which I envision doing till the loans are paid off. I understand I can’t charge the company interest on the loan , is this true? Both my wife and I are higher rate tax payers my accountant doesn’t think it’s worthwhile charging interest even if we could .

Graham Bowcock

14:11 PM, 23rd March 2019, About 3 years ago

Reply to the comment left by Tim Jones at 23/03/2019 - 07:36

I'm not an accountant so can't give a definitive answer, but there is a flaw if your proposal that I can see. If you do charge interest on your director's loan, which will then be tax deductible in the limited company, you will then personally have an equivalent receipt. This receipt will be taxable at your higher rate, so you will be worse off.

I am not sure that you can offset the external loan costs on your mortgage against the income, so you will lose out.

Next time you need to borrow consider keeping borrowing within the limited company. That way the finance and interest costs (and legals, etc.) are entirely tax deductible. There may be a small premium on interest payable by a limited company, but this is usually more than offset by the tax benefits (and does not affect your personal income/tax situation). We have just done this with Lloyds, loan to a limited company secured on our own house.


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