Would i save tax by setting up a company?

PJGILL

I will briefly explain my circumstances: I am married, no children and own three rental properties that are all rented out. These three properties are manged for me by management agents (i am not ina position to do it myself due to geography). The rent at the moment far exceeds the interest payments on the mortgage. I complete my tax reurns each year and so far have made small losses but this year i am inline ot make areasonable profit. I am a higher rate tax earner.

I was wandering if there would be any benefit in setting up a company with the properties, rental income etc as assets and the cost of the management fees as expenditure. On top of this would i be able to pay myself a nominal amount (1 pence) and the remainder of the profit in dividends so that they were taxed at 20% rather than 40% as i will this year because it would be seen as income.

Any advice would be much appreciated.

Richie(UK)

Hi Phil,

* I think you should seek some professional advice. You have an existing business and you are considering a transfer of it to a limited company. There may be Capital Gains Tax implications associated with this and you will wish to consider Incorporation Relief or Gift Relief.

* Keep in mind that Corporation Tax will be payable on any company profits.

* Also, keep in mind that Corporation Tax will be payable on any gains that the company makes on disposing the properties.

* Dividend income will be taxed at an effective rate of 25% of the amount received for a Higher Rate taxpayer. (Actually 32.5% with a 10% tax credit). For example, tax on a net £10,000 dividend would be £2,500 (25%) - calculated as gross (£11,111) x 32.5% = £3,611.11 less tax credit (£1,111,11) = £2,500. Does that make sense?

* You may want to consider having a (small) salary in terms of qualifying for various NIC related items.

Elaine_Wilson

If you are going to draw the money out I doubt it will be worth it. The main advantage I can see to having these properties in a company is that you can defer some of the tax you would otherwise pay by leaving the money in the company until you are only liable at the basic rate. Also it can be helpful in passing properties to children but this does not apply to you yet.

I agree with Richie that you need to look at the capital gains position on selling the properties to the company. I would expect this to be a chargeable disposal but I'm not sure how the various reliefs available work.

If the only source of income for the company is the letting of properties then it might be classed as an investment company. I think this loses the right to the small companies rate of corporation tax so the 28% rate could apply.

I've done a couple of quick calculations and if the whole net income is drawn out by you (and you're already a higher rate taxpayer by virtue of your other income) then the total tax paid would be -

46% if the standard rate of corp tax applies, and

40.75% if you can get the smaller companies rate.

Is your spouse a higher rate taxpayer? If not then savings might be made if she owned the bulk of the company but this has other implications.

PJGILL

Thank you. My wife is a higher rate tax payer also.