Question on tax when extracting money from a companyMake Text Bigger
So, our property company pays corporation tax at 19%.
If we then declare a dividends, due to being a higher rate tax-payers we pay another 32.5% tax personally, and the company receives no tax credit for that. That’s a net effective tax rate of 51.5% – ouch!
Having said that, it’s still a lot better than the net effective tax rate we would have paid as a a partnership and remaining subjected to Section 24 finance cost restrictions. Nevertheless, we have been considering other ways to extract funds from the company more tax efficiently now that we have fully drawn down our directors loan accounts, which we created as a result of a capital account restructure using bridging finance pre-incorporation and then loaning the cash back to the company before redeeming the bridging finance.
Our thoughts are to set up an LLP specialising in property maintenance management and property consultancy. We could charge our own Limited Company up to £85,000 a year without having to register for VAT. This would reduce our company profits, so that’s a 19% tax saving right there.
Assuming the LLP has only minimal expenses, my brother and I could allocate the entire profit of the LLP to ourselves and pay only 40% tax. That’s a net effective tax saving of 11.5% on up to £85,000 of income.
My brother and I incorporated our property rental business two years ago, with the assistance of Property118 and Cotswold Barristers. Excellent service by the way, both comprehensive and efficient. We have since switched to their recommended accountants too. They have a far better understanding of property taxation than the book-keeper we used previously to deal with our self-assessment returns. We have learned that you get what you pay for.
We have booked another tax planning consultation with Property118 and our accountants to have this idea checked out, but I thought it would be useful to share it with a wider audience to seek additional feedback.
Name withheld for anonymity.
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