June 2021

When is it ok to form a limited company for your buy to let business and when is it not?

A recent report by estate agent Hamptons showed that a record number of new limited companies have been set up by landlords in 2021, revealing a 23% increase compared to the previous year.

Why? When a landlord buys a property through a limited company, they are able to benefit from more attractive tax rates, and this has led to a greater increase in this practice over the last year.

But it’s not appropriate in all circumstances and you’ll need to proceed with caution. Here we explore the subject on a deeper level to ensure any decisions you make are well informed.

What is a buy to let limited company?

A buy to let limited company is a company you can use to buy investment properties through a limited company instead of in your own name. Some may refer to this as a Special Purpose Vehicle ‘SPV’.

The same rules apply for a buy to let limited company as a usual limited company, with business owners having to submit regular accounts to Companies House. These include:

Annual accounts
Confirmation statement.
Corporation tax return (CT600)
VAT returns
Employer (PAYE) returns

Buying a property through a limited company is more cost effective in terms of tax for some landlords, as the laws on buy to let taxation have made investing in property more expensive. For example, mortgage interest costs can no longer be reclaimed in full by landlords who own residential properties in their personal name. Additionally, landlords can no longer claim the 10% wear & tear allowance.

How does a buy to let limited company work?

When you invest in property some landlords choose to get a buy to let mortgage, which is usually in their name.

If you choose the alternative route and set up a buy to let limited company, the company owns the properties rather than the individual, and the mortgage is taken out in the company’s name.

The landlord would pay money into the small business set up and this money would be used for a deposit for purchasing the properties. The remaining monies would then be covered by a limited company buy to let mortgage.

In order to get the mortgage, the limited company has to be set up before the mortgage begins but the limited company does not have to be trading for a certain amount of time.

What are the benefits of setting up a limited company for buy-to-let?

Setting up a limited company for a buy to let property has many benefits, for example it allows landlords to continue to offset their mortgage interest against their profits.

A buy to let limited company also means a landlord’s profits are subject to Corporation Tax rather than individual tax, meaning they’re taxed at a rate of 19 percent rather than a greater rate for individuals. Companies can also claim mortgage interest as a business expense, but they still usually have to pay stamp duty on a limited company buy to let.

Within a corporate structure like a limited company, there is an opportunity to pay a tax efficient salary and dividends, through tax benefits. The first £2,000 of dividend income for each recipient is taxable at 0% – this rule isn’t available for those who aren’t set up as a limited company.

These are just a few of the incentives for landlords to choose a limited company structure, and others include:

Tax relief for all interest paid
Keeping personal finances separate
Income that has accumulated in the company can be distributed after retirement
If ownership is to be passed or shared between family members, share capital offers greater flexibility than real property
Limited companies have a separate legal status and are considered as separate legal entities, offering limited liability protection to landlords
When using a limited company, landlords can also consider the option of selling the company instead of the property. Stamp duty on shares is 0.5%, making it a better option for those looking to buy
For landlords planning to pass their business to family members, succession planning is a lot easier with limited companies than an individually owned.

What are the disadvantages of a buy to let limited company?

As with any tax planning, there are some disadvantages to explore. These should be considered by landlords when choosing which is the best option for their personal circumstances:

If a landlord were to transfer an existing property to a buy to let limited company, they would be subject to capital gains tax and stamp duty tax. The stamp duty land tax would be based on the market value of the property being transferred.
Once the limited buy to let company is set up, the company will need to file an Annual Tax on Enveloped Dwellings (ATED) return, though this is only if the value of the property is above £500,000.
Once the landlord has used the tax-free dividend allowance of £2,000, the dividends will then be subject to the landlord’s marginal rate of tax, which could anywhere between 32.5% or 38.1%.
The number of lenders willing to provide a mortgage for a buy to let limited company is lower and the mortgage interest rates tend to be higher. Of course, this is likely to change once the market begins to change and adapt this newer way of acquiring property, but currently this demand does not reflect the behaviour of the lending market.
There are also additional administration costs required to manage a company, which will result in additional compliance costs and overheads.

Whether a landlord chooses a buy to let limited company or not completely depends on their personal circumstances, properties acquired and what they plan to do in the future with the portfolio.

As always, we’re on hand to advise on the best tax planning route taking into consideration your circumstances. Contact us today if you require support.

There is a lot of uncertainty surrounding finances, especially given the current circumstances. As a result, business owners and sole traders are naturally asking more questions.

With a number of key financial dates approaching, our experts have provided answers to this month’s frequently asked questions.

When does the furlough scheme end? What are the key changes in August and September?

The Coronavirus Retention Scheme, or furlough as we know it, has been extended until 30th September 2021. This means after this date the government will no longer provide financial contributions to employees’ salaries.

Until the end of August, the government will continue to contribute, but as of July 1st, this amount will begin to lower.

In July, contributions for hours not worked will lower to 70% of wages up to £2,187, and in August, 60% of wages up to £1,875.

In line with previous months, for hours not worked, employees are still required to receive 80% of wages up £2,500 per month.

This means, as of July 1st, employers will be asked to make a contribution of 10% up to £312.50, and 20% up to £625 from August until the scheme ends in September.

Should self-employed workers claim the 5th SEISS grant? How is this calculated?

The fifth and final Self-Employed Income Support Scheme (SEISS), is available to self-employed workers with lost income from 1st May to 30th September. This should be available to claim from “late July”.

To be eligible for the grant, you must have traded in the tax years 2019-20 and 2020-21 and have submitted your tax returns on or before March 2nd, 2021.

The criteria require you to either be currently trading but experiencing a lack of demand, or operating at a lowered capacity due to coronavirus, or be unable to trade due to current restrictions or measures.

Your 2019-20 self-assessment tax return will be assessed, and you will not be eligible if your trading profits exceeded £50,000. You should only apply for this grant if you honestly believe your income will take a hit in the given trading period (May-September).

Different to the previous grants, the upcoming fifth grant will be calculated based on how much your turnover was reduced between April 2020 and April 2021. Should your turnover reduction be 30% or over, you’ll be eligible to receive 80% of 3 months average trading profits, with a maximum available grant of £7,500. If less than 30%, you’ll be eligible to receive 30% of 3 months average trading profits, with a maximum available grant of £2,850.

How do I repay SEISS grants which should not have been claimed?

In the event that you realise you have claimed an SEISS grant without being eligible, or have become ineligible due to tax amendments, you must contact the HMRC. Generally, you should inform the HMRC within 90 days of receiving the grant.

If you realise you were not eligible at the time you applied for the grant, you should inform the HMRC online you need to repay some or all of the grant. After this you will be given the bank details to repay what you owe.

If following a tax amendment, you became ineligible you should tell the HMRC of the amendment using their online form. After which they will send you a letter confirming how much you owe and how to repay it.

Grants received between 6 April 2020 and 5 April 2021 can also be paid via the self-assessment tax return.

When is the next income tax liability due?

The next income tax liability payment is due on the 31^stof July

P11D- who needs it and when should it be filed?

A P11D is a form which is to be completed by employers who offer benefits. It is used to declare expenses and benefits given to employees which are not subject to PAYE tax, e.g., company car, medical insurance, beneficial loans.

The P11D form filing deadline is the 6^thof July.

Got a burning question? Reach out to us at hello@shenward.com

The UK tax system is complex, there’s no denying it. And with the introduction of various COVID relief funds of late, it’s become even harder for the everyday individual to get their heads around it.

The good news is, Tax Planning exists – and tax planning strategies for individuals can be created too.

You might be thinking “How can I possibly plan how much Tax I am going to pay?” Well, it’s possible, and we’re here to tell how.

What is Tax Planning?

Tax planning is quite simply the process of arranging your affairs – making a plan – in order to legally minimise tax liability.

You’ll notice we emphasised the word ‘legally’, and that’s because contrary to popular belief, there are several ways in which individuals can legitimately reduce the amount of tax they are or will be liable to pay.

How? By understanding the wide range of reliefs and provisions in the UK.

Why are Tax Planning strategies important for individuals?

Tax Planning strategies for individuals are important. FACT.

They enable you to take advantage of opportunities which minimise your tax bill without breaking any rules or being deceitful.

Developing a tax plan and sticking to it will mean you get to keep hold of more of your finances to either invest or spend. There are times when you are starting a new business, acquiring or disposing a business, or even property, plant & machinery, where careful planning will be required.

AGRESSIVE TAX AVOIDANCE AND TAX EVASION ARE NO GO AREAS

Aggressive Tax Avoidance

Aggressive tax avoidance has and always will be a bit of a grey area. Of course, it’s frowned upon by the government, but the final decision is always made in court and a court hearing must take place.

Why? The courts need to determine whether there is manipulation of the law in a way that doesn’t represent the government’s tax intentions. It’s worth noting that if you’re ever in a situation whereby you’re unsure of whether your actions will be classed as tax avoidance, seek professional advice. HMRC will not take it lightly if found to be avoiding tax, and you’ll end up having to pay the full amount of tax which would have been due, PLUS INTEREST.

We discourage clients against aggressive tax planning or tax avoidance schemes. We ALWAYS advise clients to avoid taking advantage of tax legislation for which it was not designed for, i.e. promoting HMRC’s anti-avoidance legislation wherever it arises.

Tax evasion

Tax evasion refers directly to an individual who deliberately avoids paying their tax. They are classed as being non-compliant with the law regarding payments, nor the policies.

As you can imagine, tax evaders deliberately break the rules to ensure that they don’t pay the correct amount of tax. Usually, it involves misrepresentation or concealment of the true state of finances to the authorities. TIP: Tax evasion is a PROSECUTABLE OFFENCE, so don’t be tempted. Failing to declare your full income or hiding tax assets just aren’t worth it.

At Shenward, we act for clients who may face HMRC inquiry under their most serious line of enquiry, Code of Practice 9. We have a successful track record in advocating clients’ positions to achieve an optimal outcome for all parties.

Tax Planning Recommendations

Now we get down to business. By now, you’ll understand that tax planning is legal, but that doesn’t mean to say you shouldn’t seek professional support. To give you an idea as to whether you could benefit from tax planning support, we’ve outlined our ideas and recommendations below.

Income tax ideas and recommendations

Can you exchange part of your salary for benefits?

Exchanging part of your salary for tax free benefits is extremely valuable to those close to the higher tax threshold – between £100,000 and £150,000. Opting for tax efficient benefits can help you reduce your salary to under the threshold and is completely legal.

It’s important to note that since April 2017, the number of tax-free benefits on offer has significantly reduced, so you’ll need to ensure you’ve done your research. Examples of tax-free benefits include cycles for commuting and childcare vouchers – some even opt for onsite nurseries.

2. Can you take advantage of the dividend allowance?

Company owners paying themselves a salary can be tax efficient if they take advantage of the dividend allowance. The tax-free dividend allowance currently stands at £2,000. This means you can take £2,000 from your company every year outside of your salary without paying tax on it. Anything more than that is taxed based on your income tax band:

Basic Rate 7.5%
Higher Rate 32.5%
Additional Rate 38.1%

3. Can you restructure your buy to let portfolio within a marriage?

Married couples have an added advantage when it comes to income tax. Where property is involved, if one member of the couple is a basic rate taxpayer and the other a higher rate taxpayer, it would make sense to ensure that the basic rate taxpayer should receive taxable rents. However, it’s a complicated process and if not managed correctly, you can end up wiping out the savings with other taxes triggered.

4. Can you incorporate let properties into a ltd company?

In certain circumstances, it may be beneficial to form a limited company to manage the property let portfolio. There are several advantages to incorporating your portfolio into a limited company; namely enabling mortgage interest relief which is tax deductible, taking advantage of lower tax rates (corporation tax at 19% and dividend tax at 7.5%), and future planning i.e. passing down wealth to your family. Taking your non-minor children into this company and gradually reducing your own involvement/ownership can be very tax-efficient in passing down your wealth.

There are several drawbacks though, such as capital gains tax which is payable upon transfer of properties, and it is unlikely incorporation relief would be available. Transactional costs such as stamp duty, legal fees, borrowing costs are also payable. So, it is vital to plan ahead. An alternative option could be the implementation of trusts. Which would help mitigate inheritance tax upon your death. This requires a detailed assessment of your current portfolio to determine whether this is a viable option.

5. Have you got a spare room you can rent out in your house?

Yes. There is such a thing as a ‘rent a room’ relief, and it’s been around for many years. The relief allows homeowners to rent a room for a value of up to £7,500 per annum before paying tax.

Carry back ideas and recommendations

Can you use past capital losses?

Capital losses are carried forward indefinitely, so make sure you’re aware of the process and speak to your accountant.

Are you using your annual exemptions?

In tax year 21/22 everyone is legally allowed to realise a capital gain up to the annual exemption threshold of £12,300. Whilst it’s available during the year, if not used, it cannot be carried forward.

Can you use Investors Relief?

These are available to businesses and those with shares in personal companies only and cover holdover relief and rollover relief.

Are you eligible for Business Asset Disposal Relief?

Formerly known as Entrepreneurs’ Relief. Previously each individual had a lifetime limit of £10m gains at which they pay a flat rate of 10%, as opposed to 20%. Lifetime limit reduced to £1m in 2020 Budget. It is still a very lucrative relief for those eligible businessmen/women and shareholders, provided the criteria are met.

Can you utilise your spouse’s annual exemption?

Transferring 50% of the property before sale to a partner would mean it was treated as though your spouse was a joint owner from when the property was first bought.

Can you claim relief when you sell your home?

Usually exempt under Principal private residence rules. If you let out your previous home and live elsewhere – you can claim PPR for the time you lived there.

Inheritance tax ideas and recommendations

Can you switch your assets?

Inheritance Tax is always payable on the value of your estate if it exceeds £325,000. The good news is business assets and agricultural land have IHT exemptions. It’s always worth asking yourself whether you can switch your existing assets to things such as shares in private trading companies, or even agricultural assets as an example.

Why not leave your family home to a dependent?

In the tax year 21/22, there is an additional Inheritance Tax nil rate band of £175,000 when a property belonging to a deceased loved one is left to a dependent – dependents are classed as biological, step or adopted.

Why not make charitable gifts in your will?

Many people naturally want to leave part of their estate to charity when they pass but doing so can also reduce the need for your family to pay Inheritance Tax. Leaving at least 10% of the net value of your estate is usually the way to go. However, where the estate value is high, a reduced rate of 36% is charged where 10% or more is left to charity.

Can you take advantage of equity release plans?

If you’re aged over 55, there are a numerous equity release plans available to free up funds for multiple purposes. It works by using the value of the home to release a lump sum, which is only paid back when the homeowner goes into long term care or passes. The benefit is that the homeowner can still continue to reside in the home.

When did you last update your will?

Many people make a will and then never look back over it. Regularly reviewing your will as your family and financial circumstances change will help you understand what Inheritance Tax your family may be liable to pay.

Consider leaving your ISA to a spouse/civil partner

Income and capital gains received through an ISA are tax-free throughout their lifetime, but when you pass, the value is added to your estate and becomes subject to Inheritance Tax. But, if you leave the ISA to your spouse of civil partner, they can’t legally be charged Inheritance Tax – gifts between spouses/civil partners are exempt.

Contact us to talk through your tax planning strategy

Over the years, we’ve supported hundreds of people with their tax planning strategies, ensuring they are always acting legally and in line with HMRC regulations. If you’d like to find out how we can help you, please get in touch here.

Month: June 2021