Are you a high tax paying employee or business owner?
Do you own and rent Buy-to-Let (BTL) properties?
There are many people like you that are paying 40%+ tax because of their successful careers and / or businesses. Having good cash flowing income from employment and businesses means that there are greater opportunities to buy BTLs. This is of course good news as they are generating additional income as well as developing their pension strategies.
There are some down side to this way of working. If you are earning enough money from your employment / business that requires you to pay 40% tax as a high tax earner then all of the property income will also be taxed at 40%.
What is the good news?
If you set up a limited company as a “Property Management” company that can then provide you with the following chargeable services:
• Management of your property at rates between 8% and 15% (1), (2)
• Guarantee your rental income between 70% to 80% (3)
A high street estate agent can provide you with one of the two above options. That means that so can you if you wish to manage your properties through a limited company. You can therefore set up a limited company to charge you 15% of rent received from your tenants as it is an arm’s length transaction provided by the fact that other agents in your local are provide similar services.
Is VAT chargeable?
A good number of clients have asked: “If I set up a limited company will I need to register for VAT?
The answer to this is (at the time of writing)
• Rent is not VAT-able (unless commercial and the landlord has opted to tax)
• The service element of letting agents is VAT-able and you will have to register for VAT once your turnover is about to exceed £79,000 (6)
Example 1 – Set up a limited company – Letting agent
Susan is an employee on £85,000 and therefore is a high rate tax payer. She owns property, mortgage free (to make it easier for our example). Her husband John is not working at present but has savings that take up his personal allowance. John sets up a property management company and charges 15% for his services to manage the properties. He collects rent though the limited company amounting to £50,000. The service element is therefore £7,500 (15% of the £50,000 rent collected). He can therefore send Susan (self-assessment tax allowable cost) an invoice from her limited company for £7,500 and therefore the net rent received for her personal tax is therefore £42,500 (£50,000 less £7,500).
How does this compare to leaving all her properties as self-assessment?
Susan’s perspective Just Self-Assessment Self-assessment charged by limited company
Rent Received £50,000 £50,000
Less agent fee £7,500
Profit £50,000 £42,500
Tax payable 40% £20,000 £17,000
Net Pay £30,000 £25,500
You can see that Susan has made a tax saving of £3,000 by helping John set up a property management company
John’s perspective 15% management fee in a limited company
Property Management fee £7,500
Corporation tax 20% £1,500
Net Pay £6,000
If Susan did not help John set up a limited company she would have paid tax of £20,000.
In the second scenario where John created a limited company the tax that they would pay combined, would be £18,500 (£17,000 tax paid by Susan and £1,500 tax paid by Jon).
Example 2: Rent Guarantee
Let us keep with the examples that Susan is a high tax rate payer and John has utilised his personal allowance through savings and he set up a limited company. His limited company is set up on a similar basis to other local letting agents that provide a guaranteed market rent of 70%.
The amount of collected rent is still £50,000 but this time John only gives Susan 70% of the rent and therefore his service cost is £15,000 and provides Susan with a net income of £35,000.
Let us take a look at the impact that this has on the tax situation for both
Susan’s perspective Just Self-Assessment Self-assessment Self-Assessment charges
charged by limited company 15% by limited with rent guarantee 75%
Rent Received £50,000 £50,000 £50,000
Less agent fee £7,500 £15,000
Profit £50,000 £42,500 £35,000
Tax payable 40% £20,000 £17,000 £14,000
Net pay £30,000 £25,500 £21,000
Using this structure Susan is therefore able to save an additional £3,000 in tax.
John’s perspective 15% management fee in a Providing 75% guaranteed rent
limited company through a limited company
Property Management fee £7,500 £15,000
Corporation tax 20% £1,500 £3,000
Net pay £6,000 £12,000
Now that John is making more money through the guaranteed rent scheme he is also paying more tax by £1,000, compared to just charging a standard rate of 15% management fee.
The different scenarios therefore show a total tax payment as follows:
• £20,000 tax payment no limited company structure
• £18,500 tax payment for the limited company charging 15% management fee
• £17,000 tax payment for the limited company that provides a guaranteed rent structure.
As you can see there are ways to minimise tax on your property portfolio but there are some considerations to bear in mind:
• The rent guarantee is a risk as there could be voids with any property. Given the fact that I base 10% voids on my properties this is a manageable risk to the tax saving benefits
• There is an additional administration and accountancy fees associated with a limited company
You could increase you rent even further through a limited company if you were to provide a guaranteed rent of 70% (single tenancy) and multi let the properties. Let us assume that the £50,000 rental income was derived from 100 properties with a single let market rent of £500 each. John knows that by multi letting that he can generate an average rent of £800 (net of all bills, voids and maintenance). He provides Susan with a guaranteed rent of 70%, therefore £350 per property:
Susan (guaranteed rent) John
Rent Received £35,000 (£350 X100) £80,000 (£800 X 100)
Less fees paid to Susan £35,000 (£350 X 100)
Profit £35,000 £45,000
Tax 40% / 20% £14,000 £9,000
Net pay £21,000 £36,000
In this example the total tax bill is £23,000 but they are making more (net) cash flow because of the multi let strategy.
The net cash flow position is therefore:
• £30,000 (no limited company structure 50K less £20K tax)
• £31,500 setting up a property management company and charging 15%
• £33,000 by setting up a property management company and paying 70% guaranteed rent
• £57,000 setting up a limited company, which provides guaranteed rent 70% market value and multi lets the property.
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