If you own some properties in your own name and others within a Limited Company, please read this Case Study and share it with any other landlords who might be in a similar position.

Mr X owns UK rental properties in both his own name and a Limited Company. They are all residential.

His daughter (Sally) works for the company on an employed basis, for which she receives a salary of £30,000. The company pays employers National Insurance on this and Sally pays both employees National Insurance plus PAYE income tax.

The company retains profits and pays 19% corporation tax. There are circa £100,000 of retained profits in the company bank account, which are increasing by around £40,000 per annum.

His privately owned property business produces a further £40,000 of profit. However, as of April 2020 he will not be able to offset any of the £50,000 of finance costs related to this business. The restrictions on finance cost relief have already pushed him into the higher rate tax band. Accordingly, he pays 40% tax on his finance costs and only gets a 20% tax credit in return.

He approached the 118.tax team for help to optimise his tax position.

His objectives were as follows:-

1. To make his daughter a partner for business continuity purposes. He would like to travel more as he gets older
2. To begin making provisions to hand the business over to his daughter and for associated inheritance tax provisions
3. To help his daughter to fund the school fees of his only grandchild

As further background, the equity in his personal property portfolio amounts to £900,000.

The solution

A Limited Liability Partnership is formed, the Members of which are Mr X, his daughter Sally and the existing Limited Company.

The opening capital account balance for Mr X is £900,000, hence no CGT is crystallised and no Stamp Duty falls due.

The opening capital account balance for Sally is £nil, but she does contractually agree to share the risks associated with the future running of the business. Her salaried positions ends, which saves Mr X paying the employers National Insurance Contributions. This increases the company profits, which are taxed at just 19%. Furthermore, the LLP then pays a Partners Salary of £50,000 (the basic rate tax threshold) to Sally. No employers National Insurance is payable on this, because the business is classified as ‘property investment’. Likewise, Sally only pays Class 2 National insurance at £2.85 a week. This alone is a huge saving. However, Sally agrees to draw just £30,000 from the business, thus leaving £20,000 (less 20% tax on £37,500) retained in the business. This is chipping away at the value of her fathers estate for IHT purposes.

Having structured the business this way, Mr X is saving employers NIC’s, paying no tax at 40%, retaining more profit in his company (which is taxed at just 19%), enjoying access to more post tax profits to draw upon than ever before and gradually mitigating his exposure to IHT. All funds now sit within the LLP bank account. He can draw upon these without further taxation, bearing in mind that LLP tax is only payable on allocated profits, NOT on drawings. This means he can also (within reason) draw upon the funds held by the LLP in regards to the retained profits of the company, WITHOUT DECLARING DIVIDENDS WHICH WOULD OTHERWISE BE TAXABLE. This is because he started the business with an opening Members Capital Account Balance of +£900,000.  Accordingly, he now has the required funds to pay for school fees for his grandchild.

Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes. The presentation below provides a useful overview of some of the options you might like to discuss with us.