Dividend Allowance - Rental Income

Brighty

Hi all

Just been thinking about this new £5k tax free dividend allowance.

I'm a PAYE employee earning £35k, so basic rate tax payer

I also have a 25% share of 3 rental properties, which after allowable expenses gives me a taxable income of approx £4.8k, which i then pay £960 tax on via SA

Is there any cunning way i and/or we, can start getting this rental income as a dividend, to make use of the £5k allowance? Maybe setting up a Ltd company to put the properties in?

FYI other owners are my wife (25%), who's share is already tax free as all earnings are below £11k. 3rd owner is my brother (50%), who lives abroad

Thanks

Brighty

lovinituk

You'll pay stamp duty transferring the properties into a ltd company and then I assume you will have to pay corporation tax on the profits before paying any dividends anyway.

Pennywise

You need to research how much it would cost you in terms of:-

a. Capital gains tax accountancy fees on selling the properties to the company,
b. Stamp Duty and legal fees on transferring the properties into the company,
c. Ongoing additional admin costs such as bank charges, accountancy fees etc,
d. Additional arrangement fees and borrowing costs if the properties are subject to loans/mortgages,
e. Double taxation upon eventual sale of the property and then again on withdrawing the proceeds from the company, not to mention liquidators costs of winding up the company.
f. There's 20% corporation tax on the profits anyway before the dividend is paid to you which is exactly the same as basic rate tax for a basic rate taxpayer.

It usually turns out to be false economy for small scale property buy-to-let-ers. General wisdom is that a limited company only really works for larger property portfolios, but maybe worth you consulting your solicitor and accountant to check out the pros and cons.

kidmugsy

You could avoid the corporation tax by making pension contributions which count as a business expense. I doubt that it would compensate for the problems outlined by Pennywise.

Have you transferred some of your wife's unused Personal Allowance to yourself? That could save a couple of hundred p.a. at minimum fuss.

HappyMJ

Brighty wrote: »

Hi all

Just been thinking about this new £5k tax free dividend allowance.

I'm a PAYE employee earning £35k, so basic rate tax payer

I also have a 25% share of 3 rental properties, which after allowable expenses gives me a taxable income of approx £4.8k, which i then pay £960 tax on via SA

Is there any cunning way i and/or we, can start getting this rental income as a dividend, to make use of the £5k allowance? Maybe setting up a Ltd company to put the properties in?

FYI other owners are my wife (25%), who's share is already tax free as all earnings are below £11k. 3rd owner is my brother (50%), who lives abroad

Thanks

Brighty

Sell your share of the properties to your wife who can then fully utilize the personal allowance she has.

Brighty

Cheers all, looks like a non starter then, was just an idle thought i had when reading another thread mentioning the new allowance

FYI, wife was has already transferred her unused personal allowance to me. Her rental income + carers allowance + part time job will now be hovering at or around her new £10k allowance, so there's no more unused to tap in to unfortunately.

Brighty

martinsurrey

Brighty wrote: »

Cheers all, looks like a non starter then, was just an idle thought i had when reading another thread mentioning the new allowance

FYI, wife was has already transferred her unused personal allowance to me. Her rental income + carers allowance + part time job will now be hovering at or around her new £10k allowance, so there's no more unused to tap in to unfortunately.

Brighty

I would hold on a bit,

you say you get £4.8k after allowable expenses...

is that old world 100% interest mortgage deductions?

how are the properties funded?

If they are outright owned, ltd may well be a false economy, but if you have mortgages, you could save a packet...

more info needed please!

Brighty

By allowable expenses i mean mortgage interest, insurances and maintenance etc, though they are mostly owned outright, very little mortgaged

Property 1 worth approx £380k with £55k mortgage, rent £975
Property 2 worth approx £300k owned outright, rent £800
Property 3 worth approx £150k owned outright, rent £575

To complicate matters, wife and i have recently moved out of our main home, property 4, and into property 2, we intend to rent out property 4, which is owned by wife and i 50/50, and use that income to reimburse my brother for lost rent from his half of property 2, we can then include our mortgage on property 4 as an expense.

Property 4 worth approx £150k with £87k mortgage, rent £500??

Brighty

martinsurrey

Without much debt I would say ltd isn't going to be worth the regulatory hassle and upfront cost of transferring ownership.