In good com­pany when it comes to sav­ing buy-to-let money

Yorkshire Post - Property - - PROPERTY - David King

WITH the in­tro­duc­tion of the 50 per cent tax rate in April 2010, higher rate tax­pay­ers will be more en­cour­aged to look for an al­ter­na­tive way to op­er­ate their buy-to-let busi­nesses, per­haps by us­ing a com­pany.

This ar­ti­cle looks at the dif­fer­ent tax rates that ap­ply to in­di­vid­u­als and com­pa­nies, and also iden­ti­fies some of the main points that should be con­sid­ered in de­cid­ing whether to use a com­pany “ve­hi­cle”. Where an in­di­vid­ual owns a rental prop­erty, he or she is taxed to in­come tax on the net rental in­come, which means that a tax rate of up to 50 per cent can ap­ply, depend­ing on their other tax­able in­come.

Gen­er­ally, a com­pany that in­vests in prop­erty would pay “small prof­its rate”, which means a tax rate of 21 per cent on an­nual prof­its of up to £300,000. This means a po­ten­tial sav­ing of up to 29 per cent, which could equate to a sig­nif­i­cant fig­ure in the case of a size­able prop­erty port­fo­lio. How­ever, as tax­able rental in­come is af­ter de­duct­ing the in­ter­est on any bor­row­ings, the po­ten­tial an­nual sav­ings are re­duced where the eq­uity in the prop­er­ties is rel­a­tively small.

When a com­pany sells a prop­erty, the cap­i­tal profit is gen­er­ally tax­able at 21 per cent rate, whereas an in­di­vid­ual, who is a higher rate payer, pays cap­i­tal gains tax (CGT) at 28 per cent, so again there is a po­ten­tial sav­ing to be had.

So far so good, but now comes the prob­lem; with an ex­ist­ing prop­erty port­fo­lio there are two po­ten­tially sig­nif­i­cant costs in trans­fer­ring the prop­er­ties into a com­pany. Firstly, a stamp duty land tax (SDLT) charge at prob­a­bly four per cent of the value of the prop­er­ties, and se­condly, there is a CGT dis­posal, with a likely tax charge at 28 per cent of the cap­i­tal profit. There­fore, with prop­er­ties that have been owned for many years the CGT is likely to be con­sid­er­ably more than for some­one who has only re­cently been build­ing up their port­fo­lio.

For long-stand­ing rental busi­nesses the po­ten­tial SDLT and CGT charges may be too costly to bear, but with a more re­cent start-up the costs may not be that great. Cer­tainly, with some­one now buy­ing their first buy-to-let prop­er­ties you do not have these stum­bling blocks.

The tax sav­ings on the an­nual rental in­come and cap­i­tal gains are “re­tained” for as long as the com­pany rolls up its prof­its.

How­ever, if there is a re­quire­ment to “ex­tract” prof­its from the com­pany, then there is an ex­po­sure to in­come tax.

In or­der to min­imise this charge you would gen­er­ally look to pay a small part of this as a salary or bonus, with the bal­ance as div­i­dends.

There may also be some merit, if prac­ti­cal, to de­fer the tak­ing of div­i­dends un­til a later year, in the ex­pec­ta­tion of a lower mar­ginal rate of tax, per­haps where an in­di­vid­ual’s in­come has dropped fol­low­ing re­tire­ment.

Gen­er­ally, the use of a com­pany is most suited to the sit­u­a­tion where the prop­er­ties are in­tended to be owned long-term, with the prof­its to be rolled up and in­vested in fur­ther prop­er­ties.

The rolled-up prof­its within the com­pany be­come po­ten­tially tax­able to cap­i­tal gains tax on a wind­ing-up of the com­pany, but where it is in­tended to keep the com­pany longer-term, per­haps with an in­ten­tion that it will be passed on to chil­dren on death, then this po­ten­tial tax charge can be largely dis­counted. Set­ting aside the tax is­sues, there are costs as­so­ci­ated with the set­ting up, run­ning and wind­ing-up of a com­pany, and these all need to be con­sid­ered.

There are clearly many is­sues to be con­sid­ered, both tax and com­mer­cial, be­fore choos­ing to run a prop­erty in­vest­ment busi­ness through a com­pany, and an in­di­vid­ual’s per­sonal fi­nan­cial cir­cum­stances must be care­fully fac­tored into the cal­cu­la­tions. As al­ways, you are strongly ad­vised to seek a pro­fes­sional opin­ion be­fore mak­ing a de­ci­sion.

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