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Using a limited company as a letting agent to reduce tax

February 26, 2014

18th February 2014 – Simon Misiewicz

Would you rather take the family on holiday rather than pay the taxman?

Would you like a quick way to reduce your tax from 40% to 20%?

The purpose of this article is to demonstrate how easy it is to reduce your tax liability. As you may know there are property management companies that charge a fee for their services.

You too can have a limited company that acts as a property management fee. This works when you are a high rate tax payer paying 40%+ in tax. Any profit that you make is going to be taxed at least 40%.

Jim is a Doctor and he decides to buy properties to build up his pension fund. He earns £100,000 and is therefore a high tax rate payer. He has properties that generate £10,000 in profit per year. Sadly for Jim he pays £4,000 in tax (being 40%).

Jim decides to set up a limited company and called it Jim’s property and he hires his wife as book keeper and property manager. He sees on the websites that good letting agents in his location are charging 15%. He decides to pay his wife Sarah £7,000.

Now Jim has the following transactions:

£20,000 rent received from tenants
(£8,000) less running costs
£12,000 profit before paying his wife that he was previously taxed.

As such the £12,000 is now going to be reduced further by the following

£12,000 profit brought forward
(£7,000) wages paid to Sarah
(£3,000) property management charge (15% of rental received)
£2000 revised profit

Jim pays 20% corporate tax on this amount being £400 compared to £4,000 that he was previously paying in tax under his self assessment.

If Jim wanted to take the £2000 out of the company he would pay an additional tax on dividends of 22.5% (32.5% less 10% credit). The additional tax would therefore be £450. The total tax is now

£400 corporate tax
£450 tax on dividends
£850 total tax.

Using a limited company and using his wife’s personal allowance Jim saved £3150 in tax. Jim could have saved even more tax if he paid his wife even more money to fully utilise her personal allowance. Apparently he thought she was being paid enough!!!

The £3150 cost saving is going to be eroded by the additional accountancy fees of circa £800-£1,200 but he will still save money. These savings will grow further as Jim grows his property portfolio.

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: www.optimiseaccountants.co.uk/events-appointments/

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