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The Best Structure For Your Property Business

April 29, 2016

Advice for property investors on setting up limited companies from Optimise Accountants

Are you a contractor who pays tax on your dividends?

Are you wondering if a limited company is the best structure to build your property empire?

The basics of tax rates

As you may know you will have to consider your tax position very carefully. The 2015-16 tax tables shown here provide us with the below information:

  • £11,000 personal allowance
  • £11,001 – £43,000 taxed at 20% (basic rate tax band)
  • £43,001 – £150,000 taxed at 40% (higher rate tax band)
  • £150,001+ taxed at 45% (additional rate tax band)

In addition we have a dividends tax rate, which is:

  • £5,000 tax-free
  • 7.5% tax on dividends for those in the basic rate tax band
  • 32.5% tax in the higher rate tax band
  • 38.1% tax in the additional tax band

A lot has been said about putting properties into a limited company. We agree that this can be a sound tax planning strategy, but it is not the best strategy for everyone.

Scenario 1 — put property into a limited company

Let’s assume that Jane wishes to have circa £40,000 gross income to maintain her lifestyle.

Currently she already has

  • £13,000 of IT contracting profits.
  • £18,000 property profits
  • 31,000 gross income

She therefore needs to decide where to put the properties that will generate the additional £9,000 profits.

She has inherited money form a wealthy aunt and wishes to build her portfolio and now thinks that a limited company is the only way. Any profits made in the limited company would then be paid as wages and dividends from her company, as illustrated in the example below.

  • £13,000 IT contracting business
  • £9,000 new profits from property
  • £22,000 total company profits 

This money was paid out as follows

  • £8,000 payment of wages
  • £5,000 dividends (tax-free)
  • £9,000 dividends at 7.5% income tax
  • £22,000 money from the company

The taxable profits in the company would be the dividends payments of £14,000 (22,000 profits less the £8,000 wages)

  • £22,000 money out of the company as above
  • £18,000 existing property income outside the company
  • £40,000 income to maintain lifestyle

Let’s now consider the tax position of the above scenario.

  • £11,100 personal allowances (tax free earnings)
  • -£8,000 paid wages form the company
  • -£3,100 profits from her properties (leaving property profits of £14,900 to be taxed)
  • £2,800 corporation tax paid (assuming the £14,000 dividends was the only profit X 20%)
  • £0 income tax on the first £5,000 dividends
  • £675 income tax paid on the dividends £9,000X 7.50%
  • £2,980 income tax on property profits
  • £0 tax on her employment income as this was taken by her personal allowances.
  • £6,455 tax for the company and income tax on money taken out of the company

Scenario 2 — more property profits in your own name

Now let’s consider if Jane kept buying property in her own name and used her limited company only for her current trade (for example, as an IT contractor).

  • £13,000 IT contracting business
  • £0 profits from property as these are kept in her own name
  • £13,000 total company profits 

This money was paid out as follows:

  • £8,000 wages taken from the company
  • £5,000 dividends taken from the company tax-free
  • £13,000 money form the company

Please note that the £5,000 dividends is company profits which will be taxed at 20%

  • £13,000 from her company
  • £18,000 existing property profits
  • £9,000 additional property profits in her own name
  • £40,000 income to maintain life style

Let’s now consider the tax position of the above scenario.

  • £11,100 personal allowances (tax free earnings)
  • -£8,000 paid wages form the company
  • -£3,100 profits from her properties (leaving property profits of £23,900 to be taxed)
  • £1,000 corporation tax paid (assuming the £5,000 dividends was the only profit X 20%)
  • £0 income tax paid on the £5,000 dividends
  • £4,780 income tax on property profits (£23,900 X 20%)
  • £0 tax on her employment income as this was taken by her personal allowances.
  • £5,780 tax for the company and income tax on money taken out of the company

As you can see Jane would pay less tax if the properties were in her own name rather than buying them in a limited company. Plus, when buying in a limited company you need to be mindful of the following:

  • Mortgage interest is more in a limited company
  • Mortgage arrangement fees are likely to be more in a limited company
  • There are additional accountancy costs and red tape
  • There is more paperwork and administration

This is why I suggest that you only have a limited company if you are a higher or additional rate taxpayer.

Next steps — become more tax efficient 

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

Please use the redeem code “Article 33” to get 33% off your next consultation call.

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk