Is a limited company the way to go if mixing an existing job with self employment?

chilswelluk

I have a full time job and earn 41k per year working for the council on PAYE. I live in Scotland, so currently pay 21% tax. I am very close to the next tax band, which is set at £43,663, thus meaning I would pay 42% tax on earnings above this.

I also run a B&B, which my ex partner ran last year (she was not working in any other employment ), but we are now separated. So I need to take charge of the tax on this myself this year. I was wondering if a Limited company would be the way to go? If I work hard this year, I can probably earn about 12k on the B&B this season. This is what I am minded to do:

1) I won’t take a salary from the B&B. Any money that comes into the B&B business, I will use for “repairs” on the property. I understand I can offset repairs against tax but not improvements. The repairs will extend to a new roof, structural work etc. and likely to amount to a considerable sum and offset any profits. I can stagger these repairs over a few years. I also believe that I can offset mortgage interest payments and proportion of the energy costs etc. Therefore I don’t expect to make a profit on the business.

2) If I am a director of the limited company, but don’t take a salary, presumably I won’t have to pay additional national insurance?

Do you think a limited company is the way to go, rather than a sole trader?

tightauldgit

When you say you 'run a B&B' do you mean you rent out rooms in your house or it's a completely separate property? Who owns it? 

I think you'd probably want to take some advice on how to deal with it - my first thought is that you'd have to probably set up some arrangement to transfer ownership of the property to the Ltd Company if you wanted to be able to claim repairs etc as a business expense or else you'd need some kind of lease agreement between the company and yourself (if you own it). Plus presumably the mortgage would have to transfer if you wanted to claim it as an expense and the mortgage company may have input to what they will allow you to do with it?

Looking at what you plan to do it looks like you are planning to retain earnings in the business and then invest those in the property in future years. I'm not sure how easy it is, if at all possible, for a sole trader to retain earnings from one year to the next in that way. If you can get the work done and spend the cash in the same tax year its maybe less of an issue

daveyjp

You can still do what you are suggesting without having a Ltd company.

Your annual tax return would include B&B business income and expenditure.

Jeremy535897

How do you run a B&B and work full time for the council? Are you going to employ someone to do the breakfasts?

chilswelluk

Jeremy535897 said:

How do you run a B&B and work full time for the council? Are you going to employ someone to do the breakfasts?

No I won't employ anyone. Its self service continental breakfast and initial check in is only after 6pm in the evening. It worked well last year.  We have way more bookings that I can fulfill, so customers seem happy with that arrangement.

chilswelluk

daveyjp said:

You can still do what you are suggesting without having a Ltd company.

Your annual tax return would include B&B business income and expenditure.

But I thought if I went as a sole trader I would have to pay additional national insurance contributions?  If I am simply a director of a limited company and take no salary, then I don't have this issue?

What would you do in my situation?

chilswelluk

tightauldgit said:

When you say you 'run a B&B' do you mean you rent out rooms in your house or it's a completely separate property? Who owns it? 

If you can get the work done and spend the cash in the same tax year its maybe less of an issue

Yes I rent out rooms in my house and own the house in my own name.  The house has a residential mortgage, but I have written clarification from the mortgage company that as long as I continue to live in the house as my main residence, then I don't need a commercial mortgage and can continue running the business as it is.  I do have barns etc that I could convert to independent accommodation, but that would not be classed as a repair and would not be eligible for a tax offset, therefore it would not be worth me doing.  Therefore tax offsetting from profits will be confined to repairs and anything else that is eligible. 

For simplicity of accounting I would plan to spend cash in the same tax year.  Apart from "repairs", there are green energy schemes etc that I can use to offset tax. So I can't ever see the company making a profit and having to pay tax.

Jeremy535897

You can't just divert the profits to a limited company. As has been said, you would either have to transfer the property to a limited company, or lease it to a limited company. That will create unnecessary complexity, lose you any main residence relief, potentially create a capital gains tax charge and cause problems with the mortgage. For 2023/24, as a sole trader you can make a profit of up to £12,570 before paying national insurance, and that is what I would recommend.

chilswelluk

Jeremy535897 said:

You can't just divert the profits to a limited company. As has been said, you would either have to transfer the property to a limited company, or lease it to a limited company. That will create unnecessary complexity, lose you any main residence relief, potentially create a capital gains tax charge and cause problems with the mortgage.

If I was a sole trader does that mitigate those concerns?  Also as a sole trader, does that make it uncomplicated to offset house running costs? As an example, if the B&B solely uses 1 out of 4 rooms in the house and the total mortgage interest is £4000 per year, I presume it would be straightforward to offset £1000.

Jeremy535897

Yes it does. Avoid claiming exclusive use of one room as business though, because that can restrict main residence relief in the future.

Grumpy_chap

Does the employment with the Council permit the OP to have a second job?

FWIW - I don't think I could run a B&B plus a full time job.  The OP seems to have found a way to make this work, perhaps it is more akin to AirBnB plus.

As I understand it, a Ltd Co company would need to buy the property (land tax / SDLT possible - I note the OP is in Scotland so this is different to England) plus when the property is eventually sold, the Ltd Co will pay corporation tax on the gain (treated as profit).

If the property remains personal and OP trades as sole trader then I doubt that all costs of maintenance can be set against tax, for example new roof was mentioned.  Are such items required anyway for the OP to maintain their home?