Stay sole trader or Limited Company

dcs1007

Hi I am a sole trader with an electrical contracting business nett profits of 42k, plus I have rental property nett profits of 46k, I ended the year paying tax 46k @ 40% total tax was near 75k taking payment in account for 2012-2013, would It be more tax efficient to open 2 Limited companies for my elec and property business, as this kind of tax will cripple me.

I would appreciate opinions !!

Davide123

Difficult to put rental into a ltd company.

Company could be useful for the s/e income... How much of that profit do you actually spend? Could you let it build up in a company account, without drawing it out?

holly_hobby

Ltd Co for elec business - yes, but you will need formal accounts (not necessarily by an accountant, although most peeps find it easier on that basis, inc myself !), and you aka the company will be subject to 2 sets of NI and Tax (personal and corporate).

However, the main benefit for operating under a Ltd Co is that you may elect to take a heavy dividend payment (dividends are not exposed to NI contributions and also have a lower tax band than Inc Tax), rather than all drawings being taken as salary exposed to both NI and IT - which should reduce your current tax exposure (NB - don't make your drawn salary too low as to seem unrealistic for the occupation/skill set).

Technically you are an employee of the Ltd Co, which is a stand alone entity, but for mge and financial application purposes if your share holding exceeds 20/25% (which I am guessing it will), then you will be classed as self employed (which just means that they will assess SA302s/Accounts instead of payslips/P60.

Property into a Ltd Co - yes technically if currently unencumbered (mge free) you could, but benefit wise its full of complications including re-financing and releasing equity with a BTL mge being tricky given that many BTL providers have withdrawn from Ltd Co business.

What you really want to do is reduce the net profit from your rental properties as to get you tax liability down .....

One of the main advantages of having let property is that you can withdraw the equity (up to max ltvs with acceptable btl lenders), and have the associated mge interest as a permitted deduction against rental income (albeit its deductable status is capped at a mge equal to the pch price of the property or market value when it entered the business/became commercial let - anything over this is fine mge wise, but from HMRC point of view it takes the business account overdrawn and is therefore not a permitted deduction).

If you have a residential mge, have you thought about remortgaging your let property(ies) to release sufficient equity to completely repay your own residential mge.

This means that you no longer have the resi mge commitment from your own income, and the equity used to repay it is classed as a business expense (aka captial withdrawal), and therefore (notwithstanding the cap mentioned above), also generating a tax advanatage. (esp beneficial if you are a 40%'er).

Or withdraw equity to redeem any other personal borrowings or any other benefit, that otherwise would not have any tax efficient status ?

Apart from the issue re HMRC and keeping the total mge (inc any equity release) under the original pch price/MV at rental, for mge purposes the rental income will have to be at least equal to 125% of mge interest (use 6% as a ball park calc fig), so this may bring its own natural cap on what you can release. Whilst some lenders also want the mortgagor to have a min earned income of 25k (which from your post seems fine).

If you already have a decent portfolio of units that are mortgaged, this may also restrict lenders/LTVs re exposure issues on any app.

Your accountant should be able to give you full guidance on this and setting up any Ltd Co for your sep Elec Business.

Sourcing a BTL mge - best route is a whole of market adviser, who will assist and thorough whom you will also gain access to intermediary only providers (which quite a few BTL providers are).

Hope this helps with a few ideas ...

Holly