Limited company tax fears ‘unfounded’

by: Heather Greig-Smith
  • 29/09/2016
  • 0
Limited company tax fears ‘unfounded’
The suggestion that buy-to-let landlords using limited companies are risking double taxation does not take account of the way profits are extracted, experts say.

The reaction follows comments by Smith & Williamson tax partner Nick Cartwright (pictured) at the Association of Short Term Lenders conference last week. Cartwright warned of a “potential double layer of tax as landlords may be taxed both in the company and on extraction of their money”, adding: “incorporation is good if you want to build up money within the company, but not if you want to live off the income as it is earned”.

Broker Mortgages for Business (MFB) said, with a little bit of planning, landlords can end up virtually no worse off than currently. More than half of the firm’s new purchases are going through limited companies, compared with around 30% of existing portfolios. That number has been steadily rising since the announcement of buy-to-let tax changes last July.

MFB finance director Simon Whittaker said by 2020/21 when the new tax arrangements for buy to let come into full force, landlords will be taxed at basic and higher rates on the profit before finance costs with just a notional tax credit at the basic rate of tax for interest costs.

He gave the example of a large scale landlord with no other income, whose portfolio yields rental income of £200,000, with £20,000 expenses and finance costs of £140,000. Under 2016/17 regulation, the profit of £40,000 is taxable, giving a net after tax income of £34,200. Under the new tax arrangements (assuming no changes to personal allowances and other tax bands) the tax on the profit before finance amounts to £39,100 – leaving only £900 after tax, a 97% reduction in income.

“If, however, the landlord holds his buy-to-let properties in a limited company, he can obtain full relief for his interest costs in the company,” said Whittaker. Again using current rates of tax and assuming no additional costs in the company, it will pay corporation tax at 20% on the profit. This would leave the company with an after tax profit of £32,000.

He added: “Mr Cartwright was correct in stating that there will then be an additional tax cost to extract the profit from the company. If all of the profit was extracted by the way of dividend the additional tax is estimated at just £1,575 – leaving our landlord with an after tax income of £30,475 – a reduction of just 11% from his position in 2016/17.”

Whittaker said this position is further improved to 7% by the landlord drawing a salary of £8,140 and taking the rest of the profit in dividends. “If the properties are owned in a limited company he could readily achieve an after tax income of £31,931, even after the ‘double layer of tax’ referred to by Mr Cartwright.”

Bob Young, chief executive at Fleet Mortgages, agreed that profit is most likely to be taken as dividends. Of Fleet’s purchase buy-to-let business, approximately 60% of it is now limited company – which has risen from 20% over the last 12-18 months.

“In terms of limited company ownership and the tax implications I don’t know many who would take out money as income, instead they tend to take out dividends,” he said.

Young added: “To me this seems like an accountant saying make sure you see an accountant and take quality tax advice before going ahead. This is common sense and is a good point to make. There will always be tax implications regardless of how you own your property: clients therefore need to ensure they get tax advice prior to arranging this and they are completely clear about what it means for their tax affairs.”

Whittaker conceded that there is a potential impact on tax payable when property is sold at a profit. “The combination of corporation tax on capital gains in the company and capital gains tax on the individual could impose a significant additional tax burden,” he said. “However, again there are strategies for mitigating the double hit.”

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