Posted by Simon Misiewicz on 2nd January 2015
Do you have furnished properties?
Are you using a limited company to manage your properties & tax?
If you have answered yes to either of the above questions then this article is for you.
Tax issues need to be diagnosed in order to be understood for a remedy to be implemented.
If you rely on your limited company for investment funds and you pay for furniture and white goods then you will be taxed on the wages / dividends that you take from the company (1).
If you are a high rate tax payer then you will be taxed an additional 22.5% in tax.
Applying the right tax reducing medicine to your tax illness.
Instead of taking money out of a limited company to invest in furniture why not buy the furniture in the company itself? The company can charge (for example) £5 per week for a washing machine. That cost would be £60 per year.
The company will obviously make a profit of £60 per year and taxed at 20%. The tax therefore being £12.
However, if you have rented the furniture to you as a high rate tax payer then there is a tax saving of £60 X 40% being £24.
Overall there is therefore a tax saving of £12.
In addition as a high rate tax payer you would have paid an additional 22.5% of any money that was taken out of the limited company to pay for furniture / white goods (1).
Let us go through an example to clarify matters: Joe buys £5K furniture and is already a high rate tax earner. Therefore the amount of money Joe takes out of the limited company is taxed at an additional 22.5% in tax (2).
The amount of tax Joe would have to pay is therefore £5K X 22.5% being £1,125. If Joe had purchased the furniture and white goods in the limited company then this tax would be avoided.
If Joe’s furnished property generates £6,000 net rental income then he could claim 10% wear & tear allowance, which I discussed in an earlier article (3). The amount of tax relief would therefore be £600.
Joe’s tax position would therefore be
- £1,125 tax paid on dividends
- £600 tax saved on wear & tear allowance
- £525 net tax paid
If Joe purchased the furniture in his limited company and charged a rental fee of £2,000 then the overall tax position would be:
- £400 corporation tax paid (20% of £2,000)
- £800 tax saved on renting furniture (40% of £2,000)
- £200 overall tax savings
As you can see that it is tax beneficial to rent furniture / white goods from a limited company as a high rate tax payer. There is no tax benefit if you are a basic tax payer.
If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing then please book an “Initial Free Consultation” on the below website: http://www.optimiseaccountants.co.uk/event/initial-free-consultation-2/
Please ensure that you check out our latest webinars and courses http://www.optimiseaccountants.co.uk/events/