Question on tax when extracting money from a company

by Readers Question

8:28 AM, 6th February 2019
About 2 weeks ago

Question on tax when extracting money from a company

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Question on tax when extracting money from a company

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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Comments

Mark Alexander

8:39 AM, 6th February 2019
About 2 weeks ago

I like the way you're thinking, but the business of the LLP would be a trade, so the fly in the ointment would be the Class 4 National Insurance Contributions you would have to pay at 9% on the first £46,350 and 2% thereafter . Then you have to factor in the running costs of the LLP. In some instances, there could be a marginal saving, but certainly not to the extent you were hoping for.

Nice try though!

We will be refunding the additional £400 consultation booking fee you paid, because this only took a couple of minutes for us to consider and respond to 🙂

Have you thought any more about moving to Portugal and obtaining NHR status. That way, you wouldn't have to pay tax on UK dividend income - See the link below.

https://www.property118.com/uk-landlords-flocking-portugal/

Richard Jackson

9:49 AM, 6th February 2019
About 2 weeks ago

I am looking at a similar senario because this year will be our first as a Ltd company. So if just living off the property income and wanting to take out say £85K, then I assume the best way would be to pay the two directors the basic rate income at zero tax (£11850 each), then zero on the first £2000 of dividends each, which would be £27,700 total, then if you took the reamining £57,300 as dividends between you, its only 7.5% tax. So the total tax bill would be £4297.50. Is this correct? What I dont understand is when does the corporation tax get deducted. So if you make £100K profit but pay out £85K as above, is the corporation tax just on the £15K or still on the whole £100K? Cheers

JJ

10:27 AM, 6th February 2019
About 2 weeks ago

If you take the money out of the company as income then HMRC will get you one way or the other. The company can pay into pensions to reduce its corporation tax bill e.g. pay into a SSAS (small self administered scheme): remember that when you take the money out of pensions you'll still have to pay tax on it at your marginal rate but this has the effect of deferring the tax bill , it may make sense if the company doesn't need the cash to reinvest and at the moment there are some inheritance tax advantages if you are under the age of 75, plus investments in the pension are free of CGT, although you cannot hold residential property in the pension. The other consideration is that when you first draw down from the pension, under current tax policy, you can take the first 25% of the pension as a tax-free lump sum, which may also make a difference.

Remember that tax policy on pensions can change and left-wing governments have a tendency to attack them along with tax-efficient savings vehicles and CT.

The subliminal message in current tax policy is if you don't want to pay 40-50% tax then keep your personal expenses down 🙂 ....i.e. don't spend....I'm not sure whether that's good for the economy or not.. 🙂

PaulM

20:13 PM, 7th February 2019
About A week ago

Reply to the comment left by Richard Jackson at 06/02/2019 - 09:49
Richard,
Corporation Tax is paid on the whole company profit, so in your example you will be paying 19% on the £100k and not 19% on the £15k (sorry).
Basic Rate Tax is increasing to £12,500 from Apr 19 so a slight benefit there.

Currently, (up to Apr) the Tax Calculations would be as follows:
£100k profit less £23,700 (2 x 11,850) = £76,300.00 profit.
£76.3k profit x 19% Corp Tax = £14,497.00 (payable 9 months post year end).
You'll then be left with £61,803 to distribute from the company.

Personally, you can then take £2k each free of tax with the remainder taxable at the 7.5% dividend rate assuming you take it all as dividends.
To ensure the dividends are "legal", you must make sufficient profits to vote them or they could be challenged by HMRC. If challenged, they could be classed as income with all the personal taxes associated with it.

PaulM

20:26 PM, 7th February 2019
About A week ago

In response to the opening Post and JJ,
JJ's advice is spot on regards the Pensions, IHT planning, & CGT.

There are other Investment options such as VCT's, but for Corporations (Ltd Companies), the charges offset any benefit.

If you can take your income elsewhere, the most tax efficient advice I could give would be to invest it back into the business.

If you have excess cash and don't want to invest it in your own properties, you could always look at Corporate Rates of interest offered (circa 1%) or possibly bonds (basically longer term savings plans).
The other choice depending on your appetite to risk, would be secured or even unsecured loans to other businesses. The highest rates I've seen charged for unsecured loans was in excess of 55%.

If you have adult aged children, you could always employ them and pay them up to the tax thresholds. There are also low amounts of cash that could be paid to low skilled workers but I think it's circa £130ish per week.

Hope this helps....P


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