Property Developers, Property Investors

Pay no income tax when taking money out of a UK limited company

simon

Simon Misiewicz

16th December 2018

How to take tax-free money from a limited company 

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord. You might be interested in our property incorporation services to transfer your buy to let portfolio into a limited company.

There are two good reasons for using a limited company as a property investor. The limited company can purchase buy to let properties and the mortgage interest costs and finance costs are allowable to be offset against the company profits. This is in contrast to the Section 24 mortgage interest relief cap, which prevents UK buy to let landlords from offsetting mortgage interest and finance costs against their rental income.

There are many ways in which directors and shareholders can take money out of a UK limited company. Some of the ways in which money may be taken out of the limited company may help reduce the corporation tax bill but some may not.

GAAR and using a rent to rent strategy in a limited company for your own property portfolio.

Many landlords bought buy to let properties in their own name to get lower mortgage interest rates compared to a limited company. They would then rent their property from their own name to the limited company. The limited company would pay a set single let rate each month. This rate would be typically discounted as the rent is guaranteed.

Example: Mr B buys a 5 bedroom property. The local letting agent suggests that he could get £700 rent as a single let and £2,000 as a multi-let. Mr B draws up a rent to rent agreement with his Company ABC LTD for 70% of the single let rent. ABC LTD pays Mr B £490 each month irrespective. This is if the property has tenants or not. ABC LTD then rents the property to professional tenants and achieves £2,000 rental income each month.

In the above example, Mr B would put in his SA100 tax return a rental income of £490 less the mortgage interest cost of £400. This means that Mr B has just £90 profit per month, being £1,080 per year.

The limited company would receive a £2,000 rental income less the guaranteed rent of £490 that is paid to Mr B. ABC LTD makes £1,510 per month. The company would generate an annual gross profit of £18,120. ABC LTD pays the utility bills given the property is a multi-let. The utility bills each month averaged at £400 per month and £4,800 per year.

Assuming there are no maintenance costs the limited company would make an annual profit of £13,320 which, before all the tax changes, would be taxed at 20%. This was a significant tax advantage that Mr B achieved using a limited company.

Sadly, those days are gone ever since the enforcement of General Anti Abuse Rules (GAAR to you and me) in 2016. GAAR was set up to prevent people from benefiting from a tax advantage by using an artificial limited company.

Extract cash from a limited company

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How to take money out of a company without paying tax

The key feature of using a limited company is that you only pay tax on the money you extract. A limited company will pay corporation tax. At the time of writing was 19%. If you do not take money out of the limited company you simply do not pay income tax. This is the polar opposite of receiving income in your personal name. You will have to pay income tax if you receive money in your personal name. The limited company can act as a tax haven until you need the money. Some may see limited companies as a pension nest egg for when their personal earnings deplete.

Here is how you can extract £20,800 out of your limited company tax-free

£8,840 Tax and NI free wages

£5,730 tax-free dividend payments

£14,570 personal allowance for 2021/22 tax year

£1,000 interest allowance tax-free (again if you charge your company interest for directors loans)

£300 tax-free gift vouchers

£15,870 extracted from your limited company tax-free

Readers of this article will be forgiven to think that the HMRC tax-free personal allowance for 2021/22 is £12,570. They would be right to challenge what we have written above. However, there is indeed the UK tax-free personal allowance of £12,570 but there is also an additional £2,000 tax-free dividends that may be taken out of a UK limited company provided that it has made profits.

Please note that wages is a business expense and tax relief will help limited company owners to reduce their corporation tax bill.

Taking wages from a buy to let company structure

We will assume that you receive no other form of income in your personal name. You can take £8,840 (2021/22 tax year). You will now need to run a payroll system and notify HMRC that you are now an employer. This, even though you are not paying tax / national insurance.

You can do this by completing the HMRC form.

It is possible if you wish to have an easier life and not to run a payroll system to submit Real-Time Information (RTI) reports to HMRC. All you would need to do as a UK limited company owner is to reduce the director’s salary from the above figures to circa £5,000. This is the threshold whereby HMRC do not require you to run a payroll system.

Please do note that you will still be required to use a payroll system and submit RTI reports to HMRC if you have other employees and pay yourself £5,000 director’s salary

Taking dividend payments from a limited company 

Only pay dividend payments out of post-tax profits or retained earnings. This is profits from previous years not taken from the business or used by the business. Only if they relate to your own limited company.  If your business has made a loss in a year and has no retained earnings, there are no dividends able to be taken.

The first £2,000 dividends income is tax-free irrespective of how much money you earn (for the tax year 2021/22 and beyond). Any dividends income in excess of £2,000 will be taxed.  As long as you remain a basic rate taxpayer (ie when you add together dividends and salary and any other income landing in your personal name) at 7.5%. A basic rate taxpayer is an individual whose total income is no greater than £50,270 in 2021/22 tax year. If you take dividends in excess of £2,000 and are a high rate taxpayer then you will pay 32.5% dividend tax. 38.1% dividend tax will be paid as an additional rate taxpayer. To be an additional rate taxpayer you would need to earn more than £150,000.

Interim dividend payments

If you wish to release “interim” dividends to the shareholders to take full advantage of the dividend income allowance. In a particular tax year, you will need to make the money transaction (ie move money from the limited company to the director’s personal bank accounts). You will then prepare an “interim” dividend certificate per director receiving the dividend. This shows the value of the dividend income that shareholders receive. It will also show the date and then sign it as a director of the company.

Please remember that you can only pay a dividend at an interim date; if at that date your accounts showed your business to be in profit. In addition, the value which means the dividend taken is no more than 81% of the profit.  I would recommend taking a pdf of the P&L on this date and retaining it with your interim certificate should you ever be asked to prove at the time the dividend was taken your company was in profit.

What documents are required for dividend distributions?

Dividend Certificates. The Director of the company must write up a dividend voucher showing the:

– Date

– Company name

– Names of the shareholders being paid a dividend

– Amount of the dividend

You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.

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What do you do when you have an overdrawn directors loan account?

Let us imagine that a property investor sets up a limited company to buy residential properties. They may have a share capital of £100 (100 X £1 shares) and the limited company director/shareholder loans the company £25,000 for the deposit of a property. This money can be repaid back to the director whenever they want and it will be tax-free. This makes sense given that the company owes the directors money.

However, let us imagine that the property is revalued and an additional £50,000 is released by the mortgage provider into the company bank account.  The directors decide to take the money out of the bank account for personal reasons. The original loan owed to them was £25,000 and this is repaid. However, now the directors owe the company the excess £25,000 taken in the withdrawal.

The UK limited company director would need to decide if they are to take the withdrawal out as a salary or as dividends. Whichever way the money is taken out of the limited company the shareholder would be liable to income tax.

If the company director was to take the money as salary, they and the limited company may have a charge of National Insurance.  The benefit of this approach is that a salary payment would attract a corporation tax relief. The tax relief will of course reduce the corporation tax bill.

Alternatively, the limited company director/shareholder may choose to take the money out as dividends. As an individual, they may pay less income tax and have no national insurance tax charges. However, the limited company will not benefit from a corporation tax relief on the dividends paid.

Directors loan accounts outstanding at the year end and not repaid within 9 months 

Where the limited company lends directors money, this can be very expensive. We strongly advise that you have no money outstanding to your limited company at the year-end. If you have any outstanding directors loan accounts then make sure it is paid back within nine months of the year-end.

If there is any loan outstanding at the year-end but repaid in full within 9 months there is NO tax to pay on the loan. However, if there is an outstanding amount of money owed by the directors to the company then a 32.5% higher rate of tax will be applied.

It does not matter how much money you owe to the company. The 32.5% tax charge applies on all monies outstanding,

The limited company can reclaim the 32.5% corporation tax charge from HMRC once the director clears their debt back to the limited company. The director loan liability may be cleared by:

– Paying the money back to the limited company

– Taking a director’s salary out of the limited company

– Withdraw dividends from the profit reserves

Directors loan account greater than £10,000

Any loans at any time which total more than £10,000 will need to be recorded on your self-assessment as a benefit in kind.

The cost of the benefit in kind is calculated at the HMRC official interest rate (circa 3% to 5%) of the total value of the loan as an annual charge. This interest charge is added to your salary from your limited company which could result in income tax for you. National insurance at the rate of 13.8% will also be applied to your for your limited company.

Charging interest on director loan accounts and tax free interest income

It is possible for a shareholder or a director of a UK limited company to be owed money from the limited company. Let us take a look at how this might happen

– £100,000 purchase of a buy to let residential property

– £75,000 is financed by a buy to let mortgage

– £25,000 is financed by the director/shareholder

At the year-end, it is possible and commercially viable for the said director/shareholder of the UK limited company to charge interest on the outstanding loan. Let’s imagine that 6% interest is charged on the outstanding director loan account. 6% on £25,000 would equate to £1,500.

The £1,500 interest charged on the outstanding director loan account would become a business expense and reduce the corporation tax bill.

In addition, it is possible that some of the interest if not all is tax-free and not subject to income tax. This is because there are two main tax reliefs that may be applied to UK limited company directors.

£5,000 tax-free savers allowance 

£1,000 tax-free allowance on interest

 

Paying money into your private pension

Pension contributions:  The company can contribute to the directors/employees pension. You can have a personal pension scheme, which may then invest in commercial properties. More may be read in NEST where they talk about a workplace pension. Any money that the company pays into a pension is a cost and therefore reduces the profit of the business (ie is tax-deductible). The company, therefore, receives tax relief for any pension contribution it makes.

The benefit of pension is that the money paid in sits outside the estate of the individual. This can work out favourably whereby the limited company is an investment company. These types of companies that own shares, buy to let properties or other income-generating income will be subject to inheritance tax at 40%. Taking money out of the limited company and paying it into a director’s pensions reduces the net asset value and in turn IHT for the shareholders.

As an example, John owns a limited company that has £100,000 net assets. He knows this will be subject to £40,000 inheritance tax as his IHT lifetime allowances have been used up in other assets. John decides to take £40,000 and pay this into his personal pension. The corporation tax relief on this £40,000 pension contributions is £7,600 (£40,000 pension contribution tomes by 19% corporation tax rate).

Not only will John’s UK limited company have a corporation tax saving but he will also save £16,000 inheritance tax as his investment company net assets would be reduced by £40,000.

Key person insurance paid by your limited company 

Key person insurance:  Your company may also pay life assurance as “keyman insurance” that pays out a lump sum to a beneficiary/trust. This is not a benefit in kind for the employee – See government website for details. Any payments that the company makes towards insurance is tax-deductible and receive the appropriate tax reliefs.

Medical bills paid by your buy to let limited company  

Employers can pay up to £500 medical bills on behalf of their employees to get them back to work if they have been sick for at least 28 consecutive days. Employers can also pay for Periodic medical checks or health screening each year without this becoming a benefit in kind. The company can also pay for eye tests (including glasses and contact lenses is used for VDU work), See government website for details. Any medical payments that are made by the company will benefit from the relevant tax reliefs.

Other staff perks paid by the limited company - vouchers

As an employee, you can also receive gift vouchers from your limited company but they cannot be exchangeable into cash. The types of gift vouchers are high street shops and restaurants. See the government website for more details. This tax-free benefit may also be used in conjunction with Perkbox where discounts to high street shops and restaurants are also provided.

The below conditions must be met (also seen on the government website):

– Each voucher provided must not exceed £50 – see the government website
– The voucher must not be exchangeable into cash (as mentioned before) – see the government website
– Voucher must not be a contractual right of the employee – see the government website
– A voucher is not given as a reward for the performance of their job – see the government website
– Directors must not be given vouchers of more than £300 in a fiscal tax year  – See government website

Please note that the £50 limited is based on the individual transaction. If you give an employee two £50 vouchers on the same day then the entire £100 amount will be taxable.  This amount will then be recorded on the P11D or as part of the payroll cycle (as from April 2016). The employee will pay income tax on the £100. The employer will pay NIC at 13.8%

Tax issues with buy to let companies paying for vouchers

No tax benefits arise if you provide an employee with a £50 voucher one day and the following week you provide them with another £50 voucher. As such these amounts will not need to be recorded as part of the payroll cycle, not reported on the P11D nor a taxable/NIC chargeable.

Optimise Accountants buy vouchers. They sit in the drawer and we give the vouchers away when morale is low or we feel staff need a pick me up. Vouchers provided to directors are marked down on a spreadsheet to ensure that they are not given more than £300. We always ensure that we do not give employees more than £50 in a given month to avoid the tax/NIC charge.

Please note that we have also clarified and cleared our position on two separate occasions with HMRC.

As you can see that there are many ways of extracting cash out of a limited company. Some of the methods are non-cash benefits but are still attractive. The company also benefits from tax reliefs on any payments made.

Mortgage editors comments

When extracting funds or adding funds to an SPV limited company, there are two key stages to tick off your to-do list before executing your plans.

 – Speak to a specialist mortgage broker – they’ll be able to advise you whether the funds can be used to finance your next buy-to-let property investment. At SPV Company Mortgages, our team is highly experienced in both limited company mortgages and personal buy-to-let mortgages; so you can rely on us for expert advice and the best buy-to-let mortgage deals for your financing situation.

 – Speak to a tax expert – they’ll be able to advise you on the most tax-efficient process for extracting or adding funds. Our friends at Optimise can provide all the up-to-date knowledge you need to avoid the tax pitfalls and get the most out of transferring your funds.

Talking to both finance specialists and expert tax consultants is the key to unlocking the most tax-efficient, high-yielding property investment structures available in the UK. Contact SPV Company Mortgages to get access to the best SPV buy-to-let mortgage deals now. https://www.limitedcompanyspvmortgages.co.uk/contact-us/

p.s. – already own a trading business? Don’t let your retained profits sit around gathering dust – check out our article to see how an SPV could help you grow them. https://www.limitedcompanyspvmortgages.co.uk/retained-earnings-limited-company-mortgage/

How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?

People that are moving from Hong Kong may decide to open up a UK limited company. This needs to be a considered thought process as you need to compare the corporation tax rates of HMRC in the United Kingdom against that of the Inland Revenue Department in Hong Kong.

The UK corporation tax rate up to April 2023 is 19%. After this date, the corporation tax rate will remain at 19% for profits up to £50,000. Any excess will be subject to a scaled tax charge between 19% and 25%. Once profits exceed £250,000 then HMRC will apply a corporation tax rate of 25%.

The corporation tax rates in Hong Kong are significantly less than the corporation tax rates upheld by HMRC in the United Kingdom. In Hong Kong, the corporation tax liability charged on limited companies is 8.25% on assessable profits up to $2,000,000, and 16.5% on any part of assessable profits over $2,000,000

Learn more about our International services to help Hong Kongers move or invest in the United Kingdom

Hong Kongers will not need to pay tax in Hong Kong on any foreign wages or dividends that they take out of a UK limited company.

How does this affect Americans readers that are looking to move to the United Kingdom from the United States?

Americans that own a UK limited company need to be aware of the US tax upheld by The IRS known as Global intangible low-taxed income. This is a tax liability that The IRS impose on Americans that own Controlled Foreign Corporations also known as CFCs.

Please note that Americans that own shares in a UK limited company will have to declare both director’s salary and dividends on their US 1040 tax return. This is because of The IRS taxes Americans on their worldwide income.

Learn more about our International services to help Americans move or invest in the United Kingdom

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