How to take tax-free money from a property investment limited company
There are two good reasons for using a property investment limited as a UK landlord. The property investment limited company can purchase buy-to-let properties, and the mortgage interest and finance costs can be offset against the company’s 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 directors and shareholders can take money from a UK property investment limited company. Some ways money may be taken out of the limited company may help reduce the corporation tax bill, but some may not.
How to take money out of a property investment company without paying tax
The key feature of using a property investment 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 property investment limited company, you do not pay income tax.
This is the polar opposite of receiving income in your name. You will have to pay income tax if you receive money in your name. The limited company can be a tax haven until you need the money. Some may see limited companies as a pension nest egg for when their 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 for thinking 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 are a business expense, and tax relief will help limited company owners to reduce their corporation tax bills.
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Taking wages from a buy to let company structure as a landlord
We will assume that you receive no other form of income in your 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 currently 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 property investment 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 property investment company
Only pay dividend payments from post-tax profits or retained earnings from your property investment limited company. If your business has made a loss in a year and has no retained earnings, no dividends can be taken.
The first £2,000 dividend income is tax-free irrespective of how much you earn (for the tax year 2021/22 and beyond). Any dividend income over £2,000 will be taxed as long as you remain a basic rate taxpayer (i.e. when you add together dividends and salary) at 7.5%. A basic rate taxpayer is an individual whose total income is greater than £50,270 in the 2021/22 tax year. If you take dividends over £2,000 and are a high-rate taxpayer, you will pay 32.5% dividend tax. 38.1% dividend tax will be paid as an additional rate for taxpayers. To be an additional rate taxpayer, you would need to earn more than £150,000.
Interim dividend payments from your property company
Suppose 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 (i.e. move money from the limited company to the Director’s bank accounts). You will then prepare an “interim” dividend certificate per Director. This shows the value of the dividend income that shareholders receive. It will also show the date and sign it as a company director.
Please remember that you can only pay a dividend at an interim date; if your accounts showed your business to be in profit at that date. In addition, the dividend value is no more than 81% of the profit.
What documents are required for dividend distributions?
Dividend Certificates. The Director of the company must write up a dividend voucher showing the following:
– 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.
Charging tax-free interest on property investment company director loan accounts
A shareholder or a director of a UK property investment limited company can 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. Imagine that 6% interest is charged on the exceptional 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 two main tax reliefs may be applied to UK limited company directors.
Other staff perks paid by the property investment limited company - vouchers
As an employee, you can also receive gift vouchers from your property investment company, but they cannot be exchangeable for 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 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 the government website
Please note that the £50 is limited based on the individual transaction. If you give an employee two £50 vouchers on the same day, the entire £100 amount will be taxable. This amount will then be recorded on the P11D or as part of the payroll cycle (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 property investment 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 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 clarified and cleared our position on two separate occasions with HMRC.
As you can see, many ways of extracting cash from a property investment limited company exist. Some of the methods are non-cash benefits but are still attractive. The company also benefits from tax relief on any payments made.