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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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Mark Alexander - Founder of Property118
15:28 PM, 26th November 2022, About A year ago
We are neither regulated or insured to give pensions advice so you would need to pose that question to an adviser who is. Sorry.
Eshan Osman
15:58 PM, 26th November 2022, About A year ago
Thank you
John Grefe
13:10 PM, 12th December 2022, About A year ago
Hi. I have read the above comments with great interest as my wife & I have spent a year taking advice that has costs us thousands of pounds. On advice from our new accountant/tax expert, mortgage adviser we have thrown the idea out. My nephew advised us several months ago that there would be an HRMC challenge to the "partnership" unless a partnership agreement has been drawn up. Also, mortgage providers are very reluctant to lend and more. What is a shame is all the time & money spent listing to wrong advice, perhaps? If you are without mortgaged properties going into a company would be the best thing. But what do I know? Thanks for your time
Mark Alexander - Founder of Property118
13:17 PM, 12th December 2022, About A year ago
Reply to the comment left by John Grefe at 12/12/2022 - 13:10
Hi John
I am sorry to read that you have been given poor advice. To be clear, it wasn't from us.
From what you have said it is still quite obvious that you have arrived at conclusions based on flawed logic.
When you book a landlord tax planning consultation with Property118 it comes with a GUARANTEE of total satisfaction or a full refund. More importantly, we are able to provide you links to HMRC's to support each and every question we answer and each and every recommendation we make.
John Grefe
14:49 PM, 12th December 2022, About A year ago
Hi Mark,
I am sorry if my comments appeared to slight you. Far from it. I have advised my son (of 52yrs) to read Property 118 and take note. There's a lot of experience the us landlords and you aren't too old to learn!
Thanks
Alice Bock
11:22 AM, 16th December 2022, About A year ago
Hi, doesn't this really only work if you are already in a partnership? I own properties in my personal name but do not have a partner. My accountant does not feel that my "creating" a partnership would be viewed favourably by HMRC? And to move then into a Ltd company would trigger SDLT and CGT? This would be extremely costly as I have owned some of them for over 20 years.
I look towards to your reply
Graham Bowcock
14:15 PM, 16th December 2022, About A year ago
Reply to the comment left by Alice Bock at 16/12/2022 - 11:22
I believe that you need to be in a partnership to make this work. Although me and my wife have owned property jointly for a long time, we were advised to create a more formal partnership and register it with HMRC; we then transferred the partnership to our limited company after a few years trading. It's not an overnight transaction.
Mark Alexander - Founder of Property118
14:29 PM, 16th December 2022, About A year ago
Reply to the comment left by Alice Bock at 16/12/2022 - 11:22
Hi Alice
If you are not a Partnership then SDLT would apply. The numbers will dictate whether it is viable to pay the SDLT to incorporate or to consider alternatives.
Incorporation relief to roll CGT into share premium in the acquiring company is not dependent on you being in a Partnership.
I suggest you book a Tax Planning Consultation with one of our team of specialists. They will be happy to work with you and your Accountant. If you are not satisfied with the service they provide the £400 consultation fee comes with a 100% refund satisfaction guarantee, so what do you have to lose?
Please see our Testimonials page https://www.property118.com/tax/testimonials/comment-page-12/#comment-132197
Mark Alexander - Founder of Property118
14:35 PM, 16th December 2022, About A year ago
Reply to the comment left by Graham Bowcock at 16/12/2022 - 14:15
Hi Graham
Partnerships are defined in the Partnership Act 1890 as "two or more persons engaged in BUSINESS with a view to profit". Did you and your wife meet this definition?
If you did, the law says you are a Partnership de-facto. Whether you register as a Partnership with HMRC or not is irrelevant.
The facts decide what's in the tin, not what label you put on the tin.
Please also see the HMRC manuals I have linked to below: -
https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm132050
AND
https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm132400