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19:40 PM, 21st November 2022, About A year ago 49
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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 £100,540 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 £12,570 a year without paying income tax or National Insurance. Furthermore, there would be no employers NIC’s to pay at this level.
If the business was incorporated the owners could each take £12,570 as a salary, which would reduce the company profits to £104,860. In the current tax year that would produce £19,923.24 of corporation tax. The owners could then take a further £37,500 each in dividends which would be taxed at 8.75%, i.e. £3,281.25 of personal dividend tax. The total tax payable would be £26,485.75.
However, as private individuals, they would pay tax of £23,428.40 each after factoring in their 20% tax credit on finance costs. This is a total tax bill of £46,856.80.
In other words, incorporation would reduce their total tax by around £20,000 a year!
This is because the £100,000 of finance costs are added to their taxable income if they remain as individual landlords. Their taxable income would then be £230,000, i.e. £115,000 each.
What would you rather pay in tax, £26,485.75 or or £46,856.40?
Now let me put it another way; the increased amount of money available for Directors’ personal spending would be circa £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 a fraction of the cost of a car with a combustion engine.
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.
This page was first published in January 2017, hence some of the older comments below. However, it was updated again on 21st November 2022.
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Graham Bowcock
14:11 PM, 23rd March 2019, About 5 years 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 5 years 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 5 years 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 - Founder of Property118
12:10 PM, 24th March 2019, About 5 years 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 - Founder of Property118
12:12 PM, 24th March 2019, About 5 years 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 5 years ago
Another part of being incorporated, is when you sell up you are entitled to Entrepreneurs' Relief on your tax
Mark Alexander - Founder of Property118
13:52 PM, 26th March 2019, About 5 years 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.
Lee Chapman
10:26 AM, 22nd November 2022, About A year ago
Im interested, but with the changes in the budget targeted against small businesses 2022/2023, im not confident. Any gains may be eroded to the point where there is no benefit to incorporating.
Denise G
16:08 PM, 22nd November 2022, About A year ago
Reply to the comment left by Reader at 18/01/2017 - 11:09As a 'bear of little brain' (well for mathematical things at least) I also hate giving money to government and HMRC etc (especially since they seem to delight in handing great wodges of it over to their mates, rather than using it as it should be used) ... so I had an idea - which I tentatively ran past financial whizkid, Alex N, who said it would work.
I was wondering, if we don't manage to mitigate our IHT liability as we will try to do, by spending everything in excess of our joint liabilities before we die, if we couldn't just add a clause to our wills saying that whatever remains after we've left what sits inside our allowances to our children, is to be distributed among a list of designated charities?
Mark Alexander - Founder of Property118
16:11 PM, 22nd November 2022, About A year ago
Reply to the comment left by Denise G at 22/11/2022 - 16:08
Hi Denise
Yes that works, providing your preference is to give money to charities as opposed to you kids that is.
Do be careful about giving shares in your own company to charities though, especially if those shares carry voting rights.