Tax payable on rental income

The company earns £20k from rental and pays £4k of this as salary. The company therefore has £16k profit for corporation tax purposes.

This will be taxed at approximately (and at most) 19% (that's the simple answer, for a more complicated version see below), so if all the after-tax profit is paid to the investor as a dividend, he will have no personal income tax to pay at all. He will see 81% of £16k plus all the £4k:

Taxman gets £3040, investor gets £16960.

Complicated answer: The company's profit is below £50k and so in the not-so-old days before the introduction of NCDT (dividend top-up tax) it would have received marginal relief on its CT bill. This meant that instead of paying 19% of all the profit, the first £10k of profit would be tax-free and the next £40k would be taxed at 23.75% (this tapers the effective tax rate from 0% at and below £10k up to 19% at £50k, because 23.75% of £40k is the same as 19% of £50k).

So on £16k profit, corporation tax would have been £1425, and the investor could have drawn the remaining £14575 as dividend, which together with his £4k tax free salary would have netted him £18575.

But the new rule works like this: It notes that the effective CT rate using the old rule would have been £1425/£16000 = about 8.9%. Non-corporate dividend distributions need to have tax paid at the full 19% rate, so top-up is payable at 10.1% of whatever he is paid. So if there is £14575 in the company kitty, and it must fund 110.1% of what he is to get, this will have to be £13238:

Taxman gets £1425+£1337, investor gets £4000+£13238.

As you can see this represents an effective tax rate of 13.8%. It also represents a net return on (the £300k) investment of over 5.7%, which is fairly respectable.

Is it safe to assume that anything over and above the £20k example, say £25k, £30k can be worked out by adding the bottom line from your £20k example above, to 81% of the additional amount? So, a £30k income would result in a bottom line of... £17,238 + £8,100 = £25,338 ?

And if the prop were now worth say £400,000 that would represent a net return of 6.3% ? In addition, the property will attract growth on its value, the fund would not.

What sort of returns do these lottery winners get on their millions then? I don't see how they can afford to fund such extravagant lifestyles with only a few measly million in the bank. A five million fund would only return a secure £250k on these figures.

They would spread their risk and not put much in the bank. They would hope to get capital appreciation on shares and property.

Most lottery winners don't have extravagant lifestyles. The one's that do would eat into their capital.

Yes, you won't go far wrong, but to err on the side of caution it'd be safer to start from the other bottom line, i.e. £16960 + £8100 = £25060, not that there's much in it.

But once the investor's personal income (i.e. whatever the dividend drawings are) exceeds the higher rate threshold, his marginal tax rate will jump from 0% to 25%. But for this to happen, the dividends would need to exceed £31400, so the before-CT company profit would need to be nearly £39k and hence the rent nearly £43k.

Yes.

Yes, it might.

Well, that's nearly £1000 a day, which buys a lot of lifestyle! And they don't *have* to live off just the interest, they can spend the capital too. Many of them probably do just that, and end up penniless once it's all gone.

"Ronald Raygun" wrote

Err - care to try again?! ;-)

"Ronald Raygun" wrote

Assuming salary of exactly 4K - try *rent* of only less than 39,717 (not 43K) giving net dividends of under 28,931.

Just testing.

I was disregarding the difference between £4k and £4745 for the salary. But (oops) I had forgotten about grossing up the dividend.

If the salary is in fact only £4000, then the (grossed up) dividend would need to exceed £31400+£745=£32145 in order for the chap to become a HRTP. Hence the actual dividend would need to exceed 90% of that, which as you point out is £28931.

I then (oops) forgot to add back the Corporation Tax. The company's gross profit would be 100/81 of the dividend (using the 19% simple version instead of the complicated version adjusted for marginal relief and NCDT), i.e. £35717, and the rent would of course be that plus the £4000 salary.

But what's £3k between friends?

"Ronald Raygun" wrote

I agree - when can I expect the cheque? :-)

I think it shows how ridiculously complicated the whole procedure is.

I bet Brown or one of his flunkies just threw it in the budget box on their way to the Commons and then they've been trying to make sense of it ever since.