Personal tax Versus Company Tax

What is the best way to hold property as investments... for the rental business, not to buy and dispose suddenly.

If say £10,000 profit was made for example, if basic rate taxpayer - personal 22% tax is due ie £2,200 leaving £7,800 to enjoy.

If the same profit was made in a co. 19% would be due if dividends paid ie £1,900 in CT by the company and then 10% on the dividends by the individual, ie 10% x £8,100 = £810 so the tax man gets hold of £2,710, leaving £7,290 to enjoy

Am i right in thinking that if all the money was to go to an individual, it is far better off carrying on as personal income and not setting up a company?

Presumably the same principal will apply to higher rate taxpayers?

Reply to
Shabs
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Correct.

Not correct. There is only CT to pay and *no extra 10% by the individual*. This is because dividends, though taxable at 10%, come with a built-in tax credit of 10% which cancels it out. There's an extra complication that the dividend is treated for tax purposes as if it were already net of the tax credit, so dividends of £9 received count as £10 taxed at

10%. This is important in terms of realising when you would exceed the higher rate tax threshold, since dividends count as gross taxable income of the net (cash) value divided by 0.9.

The CT is actually a bit less than 19%. If the company makes £10k profit, base CT is nil, and if you want to finance the CT payable on the dividend from those profits, then the dividend plus 19% thereon must add up to £10k, so in fact the company would pay £1597 CT leaving £8403 to enjoy. (1597 is 19% of 8403, and 8403+1597 = 10k).

No. From the figures above you can see there would be about £600 more to enjoy as a basic rate taxpayer, and from figures below, about £300 more to enjoy as a higher rate taxpayer, if operating through a company. So from the money enjoyment point of view, company is best.

But there are other points of view too.

There are administrative overheads involved in the company route, possibly including the expense of employing someone to do the official company returns, which could eat up much of the advantage.

Also, if the property is already owned personally then it would not normally be a good idea to transfer it into a company since any capital gains which have arisen during personal ownership would be taxable at this point.

A higher rate taxpayer earning rental profit personally would pay

40% thereon, leaving £6000 to enjoy.

A higher rate taxpayer receiving dividends pays dividend tax at 32.5% of the grossed-up value, minus tax credit of 10% of that value. So he actually pays tax at 22.5% of the grossed-up dividend, which in fact corresponds to 25% of the cash value. Hence £8403 dividend would give an income tax liability of £2101, leaving £6302 to enjoy.

Reply to
Ronald Raygun

With regards to transferring property into a company - If the house hasn't risen much, could the gain potentially be used and offset against the CGT allowance.

What would be the legal costs in transferring property to a co. presumably just costs to change the legal owner?

Also would the properties then become business assets and qualify for a substantial business taper relief advantage?

thanks in advance if anyone can help.

With regards to the annual return, i think i can fill it in myself and just pay the £15 annual fee.

Reply to
Shabs

Elect it as your PPR for however longh it takes (~3 months if on all government registers ?)

Daytona

Reply to
Daytona

Stamp Duty Land Tax? How much is the house worth?

If you file the Annual Return electronically, yes £15 is the fee. However if you insist upon filing the return on paper then the fee is now £30.

Reply to
John

Clarification here

Daytona

Reply to
Daytona

Thanks for spelling this out but I still have a question - dare I admit it? (I was briefly considering using a pseudonym for the really daft questions ;-) )

I had a look at some old tax returns (figures for the sake of the example), before the complication of the dividends tax:

ES Ltd paid ES £1000 dividends; SATR,Dividends section - I filled in: Dividend = 900, Tax credit0 Dividend plus credit = 300

IR calculation: Dividend income £1000 @ 10% = £100 which added £100 to my personal tax liablity

Where's that built-in tax credit?

Reply to
Elizabeth Smith

900 + 100 = 300 ?? Has it been a hard day?

If the company paid you £1000, the company should have given you a tax credit voucher for £111, and you should put £1000 in box

10.15, £111 in 10.16, and £1111 in 10.17.

If the company pays a net dividend of £900 cash, this counts for tax purposes as £1000 gross dividend (even though this figure appears nowhere in the company accounts) minus a notional £100 tax which is deemed already paid. Hence credit -- the recipient has no further tax to pay on the notional £1000 income unless she's a HRTP.

OK? She actually receives £900 but is treated as having received £1000 and paid the £100 tax due thereon.

If she's a starting or basic rate taxpayer, the dividend income tax rate is 10%, and the "tax credit" cancels this out so that no tax is payable. If she's a non-taxpayer, that's tough, she can't get the deemed-paid £100 back.

So the simple rules are that a non-HRTP pays no tax on divis received, whilst a HRTP pays 25% of the net amount received.

The complication is with almost-HRTPs. If, ignoring the dividend, your income is £900 short of the HRT threshold, and you pay yourself a £900 dividend, this puts £100 of the notional £1000 gross divi into the HR band. You'd have to pay divi income tax of £22.50. Why?

Of the £1000 notional dividend, £900 is below and £100 above the HRTT. Tax payable: 10% of £900, plus 32.5% of £100, less tax credit of 10% of £1000. That's £90 + £32.50 - £100.

Reply to
Ronald Raygun

I should have added, the IR calc then becomes Dividend income £1111 @ 10% = £111 Less tax credit £111 Equals £0 added tax liability.

Reply to
Ronald Raygun

The mists are beginning to clear... Maybe we can resolve the mistery now: I was a tax-payer in that year but I definitely paid the 10% on the dividend. I had foreign income but no UK employment. Is it employment income that is required for cancelling out the divi tax? What about UK savings income?

Reply to
Elizabeth Smith

"Elizabeth Smith" wrote

How did you pay it?

Reply to
Tim

Oops - forget my last posting : it was deducted on page 2 of the IR calculation.

Reply to
Elizabeth Smith

And so the mists descend again. Eat your heart out, Colin Baxter.

Reply to
Ronald Raygun

My dividend mist[ery] could've filled a whole calendar. We do get a lot of mist up here...

Reply to
Elizabeth Smith

You've been voting yourself a dividend every month?

So ein Mist!

Reply to
Ronald Raygun

I wish! - Just been confused all year round until you came up with the totally idiot-proof explanation :-)

Ich bin beeindruckt - nicht nur Goethe, sondern auch Umgangssprache!

Reply to
Elizabeth Smith

Nice though it is to bask in your admiration, hen, I must confess to it being entirely undeserved. I'm pretty close to what you might call a native bilingual.

Reply to
Ronald Raygun

Any German blood in your veins or did you live there?

Reply to
Elizabeth Smith

Not sure this the right place to go on about one's life stories, but I'll show you mine if you show me yours. :-)

Full-blooded Kraut, I'm afraid. Lived there for about 8 years spread over 3 stints, interspersed with elsewhere (mostly in English-speaking places -- first school was in Hong Kong). Diplomat's child, you see. Lived in Edinburgh ever since the Abi was in the bag.

Reply to
Ronald Raygun

Not really - although those asking questions on u.b.a reveal half their story anyway.

You can pick up mine at dagobert AT freeuk PUNKT com

Now, there's a surprise! Ever been told the beach-towel joke?

Reply to
Elizabeth Smith

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