Posted by Simon Misiewicz on 3rd March 2014
Do you have a headache thinking about setting up a limited company?
Tax issues need to be diagnosed in order for a remedy to be implemented.
The main aspect of setting up a limited company in regards to finance and tax is:
- How much money do you have as equity
- How do manage loans between you and the limited company
Sarah is a full time high earning employee and she is bored.
Let us assume that Sarah invests £100,000 into her limited company called “Sarah Property Investments Limited” as equity. Her company was designed to help her generate cash through flipping properties.
She buys two properties using the £100,000 to buy and refurbish. She has great joy and sells the properties for £150,000.
She then decides to take out £50,000 for her own personal use. She has to take the money out of the company as dividends and has to pay 32.5% in tax with a 10% tax credit.
She has ultimately paid an additional personal tax of 22.5% despite the company paying 20% of corporation tax on the profit it made from the flips
Applying the right tax reducing medicine to your tax illness.
Instead of an equity share, Sarah could have invested just £1 as equity on the remaining £99,999 as a loan from her to the company. That way she could have simply taken the money she loaned to the company back out whenever she wanted, without having to pay the additional personal tax on the distribution of dividends.
Applying the treatment
Now we have identified the treatment here are a few ways that you can apply it to your tax pains.
- Set up a limited company with £1 share
- Have a loan note that gives a paper trail to the loan arrangement between yourself and the limited company.
You can charge the limited company an interest rate charge for the privilege. You do not need to be paid this amount but you can simply let this build up into your loan account.
The downside is, the interest that you charge the limited company will be classed as an income, so you will be personally taxed on this. Therefore, this is not the greatest of ideas but was worth noting as many people have asked me in the past.
Preventing tax pains through precautionary methods. Here are a few suggestions.
Speak to your accountant before setting up a limited company as it may not be tax efficient as you think. Your accountant can also advise on:
- Company names
- Registered offices
- Company structure
- Equity and loan accounts
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 0115 946 1991 or Click Here To Email