Article relevant to the tax year 2018/19.
How can you be tax efficient using holding companies?
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)
Why do people work with joint venture partners?
Are you working with or thinking of working with joint venture partners?
There are many advantages of working with other people in your property business. Some of the more obvious advantages are:
– Time: One person may have more time than the other to get things done
– Money: One person may have the time but not the money to buy properties
– Expertise: You may be looking to create a power team. One person may be a creator of ideas and the other is an implementor that ensures things are complete. You may have another person that is happy to meet and greet other people to join the team or invest money.
– Financing: You may decide to be your own bank and therefore pool the finances together with other joint venture partners. This will then stop the need to work with banks.
– Isolation: working on your own in business can be lonely. By working with other people it makes it more sociable. The additional bonus of being able to bounce ideas off one another.
There will be other reasons why you want to work with joint venture partners.
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Working with joint venture partners
Here’s an example to better explain how holding companies can be beneficial:
There is a property investor called Stuart. He works full time as a medical consultant. He works 50-60 hours per week and is often on call. His time is taken up in his medical profession.
He attends a networking event for doctors and the subject of property investing comes up. There is a lady called Lafina that is also a doctor but has more time to spend looking at property and managing tenants. She wishes to rapidly grow her profile and needs additional money. This is a great opportunity for them to be working with joint venture partners.
Given they are both in the medical profession they agree to set up a limited company, otherwise known as a Special Purpose Vehicle (SPV).
After a couple of years Stuart and Lafina buy a few properties inside the limited company and they are making money. They are doing so well that they earn £20,000 profit after tax.
At the same time as working with Lafina, Stuart also worked with David. That joint venture partnership was doing even better as they were buying Houses of Multiple Occupation (HMOs). This company was generating a profit after tax of £30,000.
What are the tax issues of working with joint venture partners?
Stuart had no intention of taking money out of the company as he earns enough from his consultancy business. However, both Lafina and David want to take dividends out of the respective companies. Lafina takes £10,000 dividends and David wants to take his share of the profits of £15,000.
As Stuart owns the shares in the two limited companies he has to take the £25,000 profits as dividends from the limited company. As he is an additional rate taxpayer the tax on dividends is
– 0% for the first £2,000
– 38.1% for the remaining £23,000
Extracting dividends from holding companies
Stuart could have set up a holding company. This holding company could then own the shares in the companies co-owned by Lafina and David. As such the dividends could be passed up to the holding company and there would be no tax liability.
David could then look at extracting dividends from holding companies to the tune of £2,000 per year. By extracting these dividends from holding companies in this way they become tax-free. He could take out more dividends as and when he wants. However, the key difference is that Stuart has an option whether or not to pay himself these dividends.
There are many advantages of using limited companies. We have written another article on how to extract money out of a limited company.
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