Article relevant to the tax year 2019/20.
Whilst you are reading this article, you may wish to read our page on the subject of “buy to let tax for UK landlords” where we discuss all the different types of tax that you need to be aware of. Read Here for more (opens in a new tab).
There are two goods 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 contract to Section 24 mortgage interest relief cap. Section 24 prevents individuals from offsetting mortgage interest and finance costs against their rental income. More can be read about Section 24 in our other article.
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 co0mpany would pay a set single let rate each month. This rate would be typically discounted as the rent is guaranteed. This means that the limited company would receive a higher rent for tenants to gain a tax advantage
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 £2,000 rental income less the guaranteed rent of £490 that is paid to Mr B. ABC LTD makes £1,510 per month. ABC LTD 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. Anyone using the rent to rent scheme using their own limited company are advised to unravel their bookkeeping transactions after 6th April 2017. This is to prevent HMRC from penalising you because of GAR.
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%. This will reduce to 17% from April 2020. 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.
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 £8,424 (18/19 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. If you take more than £116 per week (18/19) or its equivalent. You can do this by completing the HMRC form.
Taking dividends income from a limited company
Only pay dividends 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 18/19 tax year 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 £46,350 in 18/19 tax year. If you take dividends in excess of £2,000 and are a high rate tax payer then you will pay 32.5% dividend tax. 38.1% dividend tax will be paid as an additional rate taxpayer.
Interim dividends
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 signs 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 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.
When you take a salary above a certain value. The equivalent of the Lower Earnings Limit for national insurance purposes. This is £116 for 18/19. The company paying this salary needs to register with the HMRC PAYE team (at least 2 weeks in advance of the first payment of salary by the company) as an employer and then submit monthly reports to HMRC PAYE on the amount of salary paid. Please note that there are no tax reliefs for the company when making dividend payments.
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What do you do when you have an overdrawn directors loan account?
Why do directors loan accounts exist?
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 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 is rather commons 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.
Directors loan accounts outstanding at the year end and not repaid within 9 months
Where the company is lending you as a director 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 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,
Download your property tax guide here, written by our property accountants
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 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.
This is 32.5% higher rate of tax charged is refundable once the loan is paid back however this is an additional corporation tax charge to your business in the meantime.
How can you avoid an overdrawn directors loan account?
In the above example, we saw that the directors were initially owed £25,000 by the company for the property deposit. However, the property was refinanced and the directors took £50,000 lump sum for personal reasons. This means that the directors owe the company the remaining £25,000.
This may be repaid in a number of ways:
- Taking a wage and salary at the year-end, which will be subject to the usual income tax and national insurance contributions for both the employee and employer.
- Taking dividends out of the company. Please remember that £2,000 dividends may be taken tax-free by each shareholder. Please also note that you can only take dividends out of a company provided that it made sufficient profits.
- Write off the loan. If you write off the loan at the year-end the written off value would be a benefit in kind. This would be subject to income tax for the director on their self-assessment. The company would also pay 13.8% on the loan value written off
Other non-direct cash benefits of using a buy to let company structure
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 our article or NEST 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.
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 receives the appropriate tax reliefs.
Medical bills paid by your buy to let 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 if 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 is 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 sperate 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.
Changes to childcare payments from a company
Sadly albeit the article is not that old. However, there have been changes to the tax system. There have been changes to childcare tax-free benefits and payments made on your behalf from your employer / limited company.
Scheme 1 – Free childcare
All 3 to 4-year-olds in England can get free early education or childcare. All children in England get 570 free hours per year. It’s usually taken as 15 hours a week for 38 weeks of the year. You can get it from the term after your child’s 3rd birthday. You may be able to get up to 30 hours of free childcare (1,140 hours per year, which you can choose how you take).
If you’re eligible for the extra hours, you sign up online to get a code to give to your childcare provider to reserve your place. You’ll get the extra hours once the next term starts. You will need to register for the childcare account if you are using the 30 hours of free education. To get the 30 hours of free education you do need to be working with minimum wage but cannot earn more than £100,000.
You need to ask the school a few times to see if they will accept the 30-hour ruling. I know that the school my son attends will only provide 15 hours of free schooling. Please do bear in mind that free schooling is not mandatory for private schools.
If your child is over 5, the childcare must be outside school hours and on the school premises.
Scheme 2 – Tax-free childcare
Before 1st October 2018 as highlighted in the aforementioned article that your employer / limited company could contribute towards your childcare. This would have been in the form of vouchers to pay for nannies, nursery, out of school clubs etc.
After 1st October 2018 if you are not already registered in the old scheme you can still get financial support from your employer / limited company but there are different rules and amounts that you need to consider.
You can get up to £500 every 3 months (£2,000 a year) for each of your children to help with the costs of childcare. If you get Tax-Free Childcare, the government will pay £2 for every £8 you pay your childcare provider via an online account. Your childcare provider must be signed up to the scheme before you can benefit from Tax-Free Childcare.
Check with your provider to see if they’re signed up for you to use this service.
You can get Tax-Free Childcare at the same time as 30 hours free childcare if you’re eligible for both.
See the government website for more details on both schemes. You can apply for both schemes using the government link.
If you are looking to grow or maintain a successful business then you need to look at ways in which you can get support. This support will come from the government in order for you to look after your children. It is no fun for a child that wishes to play with you but have to watch you in front of a laptop or on the phone.
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