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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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Lordship
16:46 PM, 22nd November 2022, About A year ago
Mark,
Can you give an example where someone would not benefit from incorporating?
What if they they were not worried about passing on their portfolio, had no or low mortgages, had divided the income between themselves and partner to keep under the 40% tax rate, etc. etc.
Mark Alexander - Founder of Property118
17:30 PM, 22nd November 2022, About A year ago
Reply to the comment left by Lordship at 22/11/2022 - 16:46
I think you have probably answered your own question there. The only thing I would add to your list is that they've also made no capital gains and/or never intend to sell any of their properties.
What I would say though is that UNLESS people qualify for the reliefs incorporation could well be prohibitively expensive. That's why it is so important to take professional advice first.
Andrew Dove
9:18 AM, 23rd November 2022, About A year ago
It is very useful to have a proper worked example. I for one can now adapt this example to my own circumstances. Thank you Mark.
From researching my own circumstances, I decided to own direct because my interest costs are running at around 13% of gross income. This could increase to over 20% when several mortgage refinancing events will occur over the next few years, so the benefits of interest being classified as an expense are far smaller for me than in your example.
Mark, I would ask you what level of work would my wife and I have to put in to justify being paid over £12k each as in your example? Currently I do the book-keeping and identify the buy to let investments).
Thanks
Mark Alexander - Founder of Property118
11:12 AM, 23rd November 2022, About A year ago
Reply to the comment left by Andrew Dove at 23/11/2022 - 09:18
Directors do not need to justify their salaries, you could pay yourselves a million an hour if your profits were to justify that.
However, to qualify for incorporation relief you must be able to demonstrate that you and others you engage to run your business spend at least 20 hours a week doing so. If you are considering incorporation that could be your sticking point. There may be ways around this though.
I should also point out that finance costs alone are not always the reason to incorporate. Here’s another worked example to show that https://www.property118.com/benefits-incorporating-rental-property-business-no-mortgages/
Justin Barrington
11:57 AM, 25th November 2022, About A year ago
If I incorporate my portfolio, how will this affect CGT when I sell?
I Think...
As an individual, we pay CGT at 28% on the profit.
When incorporated, the CGT will be 19% on the profit...but increasing to 25%
But to access the funds and actually spend them on fancy holidays etc we will need to pay additional personal tax at our marginal rate....but likely to be 40% or 45% on all funds taken out?
That seems to wipe out any benefit of incorporating unless the plan is to never sell?
Am I missing something?
Oliver Rees
12:23 PM, 25th November 2022, About A year ago
Surely this only applies if your income when split between partners in a partnership are over the high rate threshold? If you’re still getting 100% mortgage relief because you’re a 20% rate tax payer you won’t benefit by this and will be again paying tax twice? Corporation tax plus either dividend tax or salaried tax. If I am mistaken please explain as I am operating as a partnership at the moment.
Mark Alexander - Founder of Property118
12:50 PM, 25th November 2022, About A year ago
Reply to the comment left by Justin Barrington at 25/11/2022 - 11:57
Hi Justin
CGT on the sale of personally owned BTL property is either 18% or 28%. It is payable on the difference between the sale price minus the acqusition and capital costs and any unused annual CGT exemption allowances.
When you incorporate, the company acquires the property at full market value and any capital gains made are converted into shares in the company. Therefore, when the company sell a property, the corporation tax it pays is only on any increase in the value of the property from the point of incorporation. This makes a huge difference.
Dividends are not charged at 40% or 45%, they are charged at 0% on the first £2,000 per person per year, then 8.75% for basic rate taxpayers, then 33.75% for higher rate tax-payers and finally 39.35% for additional rate tax-payers.
There is also a lot more flexibility for tax planning if you use a SmartCo share structure. For example, the company could have multiple classes of shares so that each member of your family has their own share class. You could then declare dividends to the share classes that benefit from the lowest rate tax payers.
There are also many more options, far too many to write about here.
I strongly recommend you book a tax planning consultation with us if you would like us to take a look into what could be achieved for you. It costs £400 but is fully refundable if you are dissatisfied with the service provided, so there is no risk to you.
Mark Alexander - Founder of Property118
12:53 PM, 25th November 2022, About A year ago
Reply to the comment left by Oliver Rees at 25/11/2022 - 12:23
Please see my comment above.
You are correct in saying that the income tax planning benefits are less for basic rate tax payers, but you also need to consider the potential CGT scenario as I have described above. Also, there isn't much you can in terms of IHT planning when you are a Partnership when compared to what can be achieved if you operate within a SmartCo structure
Eshan Osman
7:38 AM, 26th November 2022, About A year ago
Hello,
I just incorporated a BTL company. My question is: Can you pay some of your profits into Directors pensions without paying them a Salary. Thank you.
Eshan
Ash Ragoo
8:51 AM, 26th November 2022, About A year ago
Reply to the comment left by Mark Alexander - Founder of Property118 at 18/01/2017 - 09:31
We have been informed and read on a few articles that property rental companies can only invest up to maximum £3600/year for directors pension.
Some other forums also indicate up to £40,000(same as a non property investment trading company)
We own HMOs in limited companies. Please can you give us an outline of the rules.
Thank you