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.

The impact of the Covid-19 pandemic on people’s lives and livelihoods has meant that for many submitting a Self-Assessment Tax Return hasn’t been at the forefront of their mind.

With a third national lockdown and schools being closed, the annual last-minute rush to submit tax returns by January 31 may not have been the No1 priority this year.

HMRC has recognised that and if you’re one of the estimated three million or so taxpayers who hasn’t submitted their tax return yet, all is not lost.

HMRC realised this week that people were struggling and this year’s deadline for the 2019-20 tax return has been extended by a month until February 28.

That means late filing won’t incur an automatic £100 fine as it would normally do, though it’s not a ‘get-out-of-jail-free’ card and interest will still accrue on tax due from February 1.

The move by HMRC means that people have a little breathing space but if you can file by Sunday, January 31 you should do so.

If you can’t, here’s a few last-minute tips to help ensure your tax return is as complete as possible and that you only pay the tax that is due.

Make sure you declare all your income

Honesty really is the best policy when it comes to tax affairs. Think carefully about every little pot of income, even foreign income that was not remitted to the UK. If you’re a UK taxpayer it needs to go down.

What about interest on savings too? Yes, rates are at an all-time low and interest is likely to be negligible but it still needs to be declared.

Income from property rentals too needs to be added. It’s worth sitting down for a few minutes and listing where your money comes from.

Claim all your allowances

There are lots of small ‘tax breaks’ and allowances that all add up when it comes to minimizing the amount of tax you pay.

Did you get married or enter a civil partnership but haven’t told HMRC? Married Couple’s Allowance could cut your tax bill by between £351 and £907.50 a year, according to gov.uk. This applies if one of you was born before April 6, 1935.

If you were born afterwards you may be able to claim Marriage Allowance which lets you transfer £1,250 of your personal allowance to your husband, wife or civil partner and could reduce their tax bill by up to £250.

Were you instructed to work from home in the early weeks of the pandemic? You could claim tax relief for additional household costs such as heating, metered water and electricity bills.

Everyone has a Personal Tax-Free Allowance, of course, but there are other allowances to consider too.

Dividend Allowance means the first £2,000 you receive in dividends from investments is tax-free.

Maybe you earn money from buying and selling on eBay or offer a freelance service. Lots of us have a little sideline these days. You can make £1,000 tax-free. This is known as a “trading allowance.”

You can also claim an allowance for spousal or child maintenance payments. Subject to certain conditions the allowance could be worth 10% of the maintenance you pay up to a maximum of £326.

If you or your spouse or civil partner are registered blind or have severely-impaired sight your personal tax allowance is increased. This is worth £2,450 for 2019-20.

Money still tight? Consider Time to Pay

HMRC wants to help if you’re struggling to pay. If you can’t afford to pay your latest bill you can set up a payment plan.

You can only do that if:

* You owe £30,000 or less;

* You do not have any other payment plans with HMRC;

* Your tax returns are up to date;

* It’s less than 60 days after the payment deadline.

You can choose how much to pay straightaway and how much you want to pay each month. You will, however, have to pay interest.

A last piece of advice?

Yes! Be kind to yourself and plan ahead. Keep the pressure off in January 2022 by doing your homework and keeping records as you go.

Keep your tax affairs in order through the year and then when the 2020-21 tax year ends in April you can start preparing your tax return early.

Why not do yourself a favour and submit next year’s tax return early and forget the January blues?

Posted in Tax

From March 2021 HMRC intends to transfer around one million VAT-registered businesses from the VAT Mainframe (VMF) onto their Enterprise Tax Management Platform (ETMP). This is a process known as “bulk migration.”

There’s a lot of jargon there and you just want to know what it means for your business, right?

It’s pretty straightforward. It’s all about HMRC modernising the way it collects taxes.

Those who have already signed up to Making Tax Digital (MTD) are not affected by the latest changes and don’t need to take any action.

However, those businesses with a taxable turnover of more than £85,000 a year who have not signed up to MTD must do so now or could be hit by a penalty charge.

What’s this “bulk migration” all about?

It’s HMRC getting its systems in order. The transfer or “migration” of these remaining businesses will mean HMRC doesn’t have to continue to operate two separate systems. The old VAT mainframe is expensive to run and maintain so it’ll save money and, hopefully, be more efficient for everyone.

What do I need to do?

Just continue to file your VAT returns as you normally would through your Business Tax Account. Things may look a little different after the switch but change is OK. Keeps us on our toes. The basic principles are the same.

MTD for VAT will be extended to include businesses with taxable turnover below £85,000 from April 2022.

Selecting MTD software and signing up to MTD now will save time and effort in the future. It’s well worth getting it sorted now.

Will my Direct Debit be affected?

Good thinking! For Direct Debits to continue after the migration, HMRC will need a valid and current email address for your business.

This is for your protection and allows HMRC to comply with UK banking regulations which ensure they must inform customers of the date the Direct Debit goes out and how much is being taken.

HMRC will ask businesses for an email address via their Business Tax Account. Doing it online saves time. Without a valid email address HMRC may be unable to collect VAT payments.

What if my accounting software isn’t compatible?

That’s only a problem if you’re still using eXtensible Markup Language (XML) and, to be honest, it’s out-dated and you need an upgrade!

XML allows some software products to file VAT returns directly to HMRC – but that won’t be available after migration. There’s only a small number of businesses who still use XML anyway and from April 21 it will no longer be an option.

I have an agent who handles the VAT for me. Won’t they sort it all out?

Yes – but do have a conversation and check everything is organised.

Following the switch over, agents won’t be able to use the agent online service for VAT clients not yet signed up for MTD. Instead they must file clients’ VAT returns through what’s called an Agent Service Account. Best check with your agent to make sure everything is ready to go.

So that’s what you need to know when it comes to VAT migration. It’s not as complicated as it sounds when you strip out the jargon.

It’s all about the continuing drive to make HMRC one of the most digitally advanced tax collectors in the world and that should be a benefit to us all.

If you need further guidance, we’re always happy to help, so feel free to contact us on hello@shenward.com.
Posted in Tax

How can R&D Tax Credits benefit your business?

‘What are R&D Tax Credits?’ It’s a question that should be asked more often in the world of business, especially since it’s an incentive to encourage innovation in UK businesses – a cash injection for any research and development that a business has completed.

Sadly, however, unless you’re a business supported by a team of accountants or business advisors, you’re unlikely to know just how much of a cash injection you could be receiving.

If you’re an active scroller on social media, or you like to keep up with the news, you’ll likely be aware that a recent report found manufacturers especially could unknowingly be missing out on this cash injection – and we’re talking thousands of pounds!

But it’s not just manufactures, and we’re here to take a look at how all businesses can take advantage of the rewards for research and development and continue their innovative work.

 

R&D Tax Credits defined

Research and Development Tax Credits are an incentive developed by the government in a bid to encourage and reward UK businesses for continuing innovation – a vital factor in the strength of the economy.

Whilst they’re available to businesses of all sizes who actively participate in research and development, there is certain criteria which any claimant must meet.

 

To make a claim under the R&D SME Regime

The finance tests must be met: 

  • Employ less than 500 employees, and
  • Have a turnover of less than £100m, or
  • Have an £86m balance sheet.

If the above criteria are met, the project for which businesses are claiming for will then need to be considered. Some of the most popular projects include:

  • Development of processing and handling techniques.
  • The design, testing and trialling of prototypes and demonstration plant.
  • Scaling up of production processes
  • Adaption to include new or alternative materials – driven by legislation, environmental aims or operational efficiency.
  • Integration of new technology with old systems.

In summary, for an activity to qualify it must be technological or scientific in nature to qualify.

It’s important to note that if the project in question has received state aid, subsidies or grants, then that project won’t be considered via the SME Regime scheme. 

 

To make a claim under the RDEC Regime

If you’re a business who doesn’t meet the criteria above, don’t worry. It doesn’t necessarily mean you’ll miss out. It’s a little more complicated, and a little less beneficial, but you could still claim 9.7% cash back under the RDEC Regime.

Again, you’ll need to discuss the project itself if you’re looking to claim via this regime.

 

How do R&D Tax Credits work?

As we mentioned, the whole point of R&D Tax Credits is to reward those businesses innovating to help the economy and individuals thrive, so it’s no surprise that the schemes are centred around financial gains.

Let’s explore.

 

Small and medium sized enterprises (SME) R&D Relief

SME R&D relief allows companies to:

  1. Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction: and/or
  2. Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

For example, let’s assume a company has incurred £100k of R&D qualifying expenditure:

£’000
The net profit before tax is 250
The tax due is (see below for info) 22.8
The profit after tax would be 227.2

 

The corporation tax computation would therefore be:

£’000
Net profit before tax 250
Less R&D relief 130 (130% in addition to what has been claimed)
Adjusted profit before tax 120
Corporation tax at 19% 22.8

 

Research and Development Expenditure Credit

This replaces the relief previously available under the large company scheme.

Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects, and it can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.

The RDEC is a tax credit which used to be 11% of your qualifying R&D expenditure up to 31 December 2017, but in 2018 it was increased to:

  1. 12% from 1 January 2018 to 31 March 2020, and 
  2. 13% from 1 April 2020

Looking at a typical scenario then, let’s assume that £100k of R&D qualifying expenditure has been incurred.

£’000
The Net profit before tax would be 250
13% RDEC on expenditure would be 13
The adjusted profit before tax would be 263

                                                                

The corporation tax computation would therefore be:

£’000
Net profit before tax 263
Corporation tax at 19% 50

                                                                                                                                                                                                                                                                    

And the tax payable:

£’000
Corporation tax due 50
Less tax credit (13)
Corporation tax payable 37

 

More information on R&D Tax Credits can be found here https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief, but if you’d prefer a friendly chat with one of our experts, please get in touch.

 

Author: Rajeev Dewedi

IR35: What’s changed?

Over the last six months, many businesses who use contractors/freelancers, as well as the individuals themselves, have been under increased pressure to review their current off-payroll working agreements due to the introduction of new IR35 laws.

However, Chief Treasury Secretary Steve Barclay announced 16TH March that the IR35 tax reforms would now be pushed back by one year to April 2021, which has raised concern for those who have already implemented changes.

Whilst many state that it is too late, the government has announced that the move is part of a broad package of measures the Treasury has announced to protect the economy from the coronavirus outbreak.

So, what does this mean?

Due to the new rules now being postponed, businesses who were significantly impacted by IR35 can delay considerations required to comply with the new rules. This will provide them with breathing space to deal with COVID-19, which is significantly escalating. 

Furthermore, contractors who would have been affected by IR35 laws would have likely seen a significant reduction in take home pay, assuming day rates were the same. However, these workers will now possible be able to continue to work under the existing regime without the undue uncertainty, especially when contractors and their families may be impacted by the virus. 

Why is this a positive move?

Due to the current COVID-19 pandemic, many freelancers and contractors have found themselves in a position where workloads have been ended or significantly reduced. 

The recent announcements now mean they are able to accept one-off contracts for work both during the pandemic if required, and most certainly after pandemic when businesses are urgently looking to rebuild following sever disruption.

If you would like clarification on any of the points we’ve just mentioned, please feel free to contact us here https://shenward.com/contact-us/.

Posted in Tax

Making Tax Digital

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions.

Every individual and business now have access to their own personalised digital tax account and these are being regularly expanded and improved. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.

A number of concerns about the pace and scale of change have been raised. As a result, the government has announced that the rollout for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.

From April 2019, VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) will be required to keep digital VAT records and send returns using Making Tax Digital (MTD) compatible software.

What does this mean for my business?

From April 2019, affected businesses will no longer be able to submit their VAT returns through the HMRC Government Gateway. Businesses must use MTD-compatible software which should enable businesses to prepare and submit VAT returns electronically to HMRC. Therefore the first period that your business will need to comply with MTD will be the period starting on or after 1 April 2019.

MTD will enable businesses to install an organised bookkeeping function (if one is not already in place) which would help business owners manage their financial affairs. Leading software providers have enhanced their service offering and offer the functionality to raise sales invoices, chase debtors, manage unpaid purchase invoices. Some software even links to your online banking and periodically download transactions thereby eliminating manual data entry. You can also receive payments from customers through payment gateways.

What do I need to do to get ready for MTD for VAT?

If you already use bookkeeping software, it’s likely you’re software is already compliant with MTD legislation. You should confirm this with your software provider.

Spreadsheet accounting is a popular method to managing your business records. Even though HMRC are keen for businesses to move away from spreadsheet accounting, it can be argued that spreadsheets are kept in a digital format. HMRC allow the continued use of spreadsheet accounting provided it can be linked with compatible software.

Manually kept records will no longer be mandated. You will need to make a decision to which software is suitable for your business.

How can Shenward help?

Shenward has been implementing a digital strategy to enable our clients to benefit from the implementation of MTD. We recognise the importance of having a strong bookkeeping function in place whether to assess performance or raise finance through debt or equity.

We have been working alongside a leading software provider to enable our clients to benefit from the MTD legislation. Our seamless implementation and integration between us and your business will enable us both to analyse and evaluate financial performance on a regular or ad hoc basis thereby enabling reliable budgeting and identifying any potential cash flow implications. Appropriate solutions can be devised and implemented accordingly.

We will be contacting our clients soon to discuss a pragmatic implementation strategy. However please get in touch with us to discuss your options and any queries you may have.

 

Conclusion

MTD for VAT is just the start of HMRC’s digital implementation strategy. Income tax and corporation tax will follow suit from 2020, at the earliest. Therefore we advise swift action to minimise any disruption to your business.

Further information about MTD can be found on the HMRC website:

https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital

 

Author
Sonal Dewedi
sonal@shenward.com

April 2018/19 Tax Year Changes – What you should be aware of

It is that time of year again when HMRC will implement the changes announced in the Autumn 2017 budget by the Chancellor of the Exchequer. These changes will come into effect starting from the new tax year on 6 April 2018.

What has changed?

Income tax 

Personal allowance will increase to £11,850. The £350 increase from the previous tax year will lead to a reduction in tax of £70 for most people.

The threshold from when you start paying income tax at the higher rate of 40% will increase to £46,350 (2017/18 £45,000).

The tax free dividend allowance is set to decrease from £5,000 to £2000 from the new tax year. The change will see a basic rate tax payer paying an additional £225 of income tax on dividends paid by their company in the 2018/19 tax year.

Benefit in kind tax rates are increasing from the new tax year. Main changes are:

CO2 emission range 2017/18 % applied to list price 2018/19 % applied to list price
0 – 50 9% 13%
51 – 75 13% 16%
76 – 94 17% 19%

The diesel supplement applied on top of the above calculated percentage will increase from 3% to 4% with the effect of increasing the taxable benefit on diesel cars.

Car fuel benefit charge multiplier will increase to £23,400 (2017/18 £22,600).

Flat rate van benefit charge will increase to £3,350 (2017/18: £3,230).

Flat rate van fuel benefit charge will increase to £633 (2017/18: £610).

Capital Gains 

The capital gains tax annual exempt amount will increase in line with the consumer price index to £11,700 (2017/18: £11,300).

Pensions 

The maximum amount you can draw from pensions without a tax charge shall rise to £1.03million in line with inflation.

Inheritance tax 

From 6 April 2018 the value of the additional nil rate band will increase by £25,000 to £125,000.

Auto-Enrolment  

Minimum employer contribution towards employee’s workplace pension will increase by 1% from the new tax year.

National Living and National Minimum wage 

The minimum hourly wage rate your staff are entitled to depends on their age and whether they are an apprentice. The rates will increase from the new tax year. For 18-24 year olds, this will be the largest increase seen in a decade.

Residential finance costs

From 6 April 2017, landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive basic rate reduction from their income tax liability. This restriction is being gradually introduced from 6 April 2017.

Conclusion

Our summary of this year’s budget is intended to give you a snapshot of the upcoming changes. There are a number of critical changes in this year’s budget so it’s critical that you plan for these implications to be mitigated. Speak with our team to find out more about how we can help you.

Author

Sonal Dewedi

sonal@shenward.com