Pay 40% tax on rental income or become a business?

pennine

Debating what to do this coming financial year. My main employment takes me into the 40% band, I also rent out a property that returns me around 6K a year after allowable expenses. Up until now I have paid AVCs to keep me under the 40% band but I have now oversubscribed and would need to buy an annuity come retirement. So I am considering becoming a business if it would save me paying 40% tax on my rental income, I have not taken advice on this yet so I wonder if this would benefit me? Thanks

nomunnofun

Firstly - how much do you earn?

pennine

Just under 50K

chrismac1

By "becoming a business" I assume you mean running a limited company. This depends on your exact circumstances.

To extract money from a limited company you can use a combination of salary and dividends. Salary gets you back to square 1, so does dividends except that they are taxable when declared. This is a crucial difference - for example, suppose you retire in three years' time. If you declare dividends of zero, zero and then £18k then you probably stay out of 40% tax all three years.

It would need to be carefully structured. If you changed the ownership of the property this would cost a load in fees, so you'd want the limited company to charge your rental self-assessment business some sort of justifiable management fee to get the rental profit out of personal tax into the company.

All in all for the income level involved here most folk will be better off just making a pension contribution and getting out of higher rate tax that way.

zygurat789

There is a CGT exempt amount of £10900 2013/14, £21,800 if a property is jointly owned, which would be taxed at 20% if the property were owned by an ltd

Lokolo

I am not sure how viable this is.

But set up a rental management company.

Person A, owns a property with a mortgage.
Person A, also owns a rental management company. This rental management company charges Person A for managing their property, so things like Gas Safety Certificates, repairs.

If rent is £1000. Mortgage interest is £200, so tax deductable. Company could charge £800 for running the property.

Any profits can be made into a dividend meaning you only pay 32.5% tax and you won't have to pay CGT because the company doesn't own the property.

pennine

zygurat789 wrote: »

There is a CGT exempt amount of £10900 2013/14, £21,800 if a property is jointly owned, which would be taxed at 20% if the property were owned by an ltd

Thanks, I didn't realise that, maybe the pensions contributions may be the way to go.

pennine

Lokolo wrote: »

I am not sure how viable this is.

But set up a rental management company.

Person A, owns a property with a mortgage.
Person A, also owns a rental management company. This rental management company charges Person A for managing their property, so things like Gas Safety Certificates, repairs.

If rent is £1000. Mortgage interest is £200, so tax deductable. Company could charge £800 for running the property.

Any profits can be made into a dividend meaning you only pay 32.5% tax and you won't have to pay CGT because the company doesn't own the property.

I was hoping this would be simple

pennine

chrismac1 wrote: »

By "becoming a business" I assume you mean running a limited company. This depends on your exact circumstances.
To extract money from a limited company you can use a combination of salary and dividends. Salary gets you back to square 1, so does dividends except that they are taxable when declared. This is a crucial difference - for example, suppose you retire in three years' time. If you declare dividends of zero, zero and then £18k then you probably stay out of 40% tax all three years.

I intend to retire in 8 years and may have already sold the property then so this may be a problem.
Who would be a reluctant landlord?
Appreciate all the replies, most informative. :T

somethingcorporate

pennine wrote: »

Who would be a reluctant landlord?

Not sure if this is rhetorical or not?! Our story was we got a 5 year fixed mortgage before being relocated 200 miles for work so rather than pay back the £8k+ ERC it worked out a lot better for us to rent out our flat, albeit reluctantly.

Since then we've had a further £25k paid off the mortgage c/o the tenant and in a further couple we would have got through our ERC period.