Dividends And Other Tax Perks For Landlords Who Incorporate

by Mark Alexander

8:20 AM, 21st March 2019
About A year 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

Graham Bowcock

14:11 PM, 23rd March 2019
About A year ago

Tim

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.

Graham

Tim Jones

15:23 PM, 23rd March 2019
About A year ago

Reply to the comment left by Graham Bowcock at 23/03/2019 - 14:11
Hi Graham - your right so I do not plan to charge interest but I managed to get 1.44 % interest only deal for £450k for 2 years which is all lent to the company ( I felt it was such a good deal I was prepared to keep it out side the company. In 2 years time I’ll be on the hunt for a decent rate mortgage within the company - by your comment it looks like securing it against your home may make terms more favourable.

AA

11:53 AM, 24th March 2019
About A year ago

I am great admirer of Mark in terms of the work he has done for the benefit of landlord ( you can sense a BUT coming ) ......BUT or HOWEVER ....I think you are wrong on this Mark. A rental operation is NOT a" business" for tax purposes whether your set up as a single owner or joint owner unless you carry out demonstrable work above and beyond the rourine tasks of letting - like laundry, cleaning , maintenance etc. ( Like a hotel) .Mark has often mentioned the 25 hours benchmark. That is only 1 hurdle you have to clear. Look up Ramsay v HMRC. Portfolio of 10 flats, incorporated, HMRC challenged, defendants won, but observe the details of the win.
On the matter of shifting of the plates, when I was a kid , I was taught tax avoidance is legal, tax evasion is illegal. Now tax avoidance is illegal. I never hear the term tax evasion anymore.
HMRC mantra is simply, if its too good to be true, it is.

Mark Alexander

12:10 PM, 24th March 2019
About A year ago

Reply to the comment left by AA at 24/03/2019 - 11:53
Hello AA

Have you ever read the latest HMRC manual I am linking to below?

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1020

Mark Alexander

12:12 PM, 24th March 2019
About A year ago

Reply to the comment left by AA at 24/03/2019 - 11:53
PS the Ramsay case was 2013. The manual I have linked to above was updated for the 2017/18 tax year

AJ

12:11 PM, 26th March 2019
About A year ago

Another part of being incorporated, is when you sell up you are entitled to Entrepreneurs' Relief on your tax

Mark Alexander

13:52 PM, 26th March 2019
About A year ago

Reply to the comment left by AJ at 26/03/2019 - 12:11
Entrepreneurs relief is only applicable where the nature of the company is trade. Property Investment companies do not receive entrepreneurs relief.

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