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#TaxTuesday: Week 5 – Cashing in on Buy-to-Let Ltd

May 2, 2017Article by Paul Avery

For our final edition of #TaxTuesday, we arrive at the most important stage of the investment cycle: withdrawing profits. If you’ve made it this far you will have noticed the familiar pattern that maximising tax-efficiency tends to bring complexity and require a bit of extra effort. Withdrawing money from a company is no exception – careful planning will be rewarded.

How do I take money out?

You can withdraw money in a variety of ways – the most common being salaries and dividends – but you risk paying additional tax if you exceed annual allowances. The company will have been taxed on profits at the corporate rate, so if you pay yourself a salary on the proceeds you will be charged income tax as well, in addition to becoming liable for national insurance payments and so forth.

Since the simplest ways to withdraw funds cost extra, the obvious recourse is to defer the income and let it grow within the company, funding future investments. But it will eventually need to be withdrawn somehow.

The most tax-efficient ways to take money out or pass it on are available to people with big, happy families and long timeframes:

  • Distribute profits as capital gains: each person gets an annual tax-free allowance of £11,000 on capital gains, even a ten-year-old
  • Distribute profits as dividends: each person gets an annual tax-free allowance of £5,000 (though the chancellor’s 2017 spring budget announced a reduction to £2000, effective from April 2018)
  • Use a positive director’s loan account, allowing the company to pay interest on funds loaned to the company by the director (and treat that interest as a deductible business expense)
  • Issue B-shares to family members, with no need to deal with land registry documents
  • Register properties in the names of lower-bracket family members
  • Give the company to your children

 

A tax accountant will be able to explain how each of these methods work. Though it may seem complicated at first, money that finds its way into a company or grows within one is not trapped there forever.

What about closing the company?

In order to avoid paying the one-two punch of capital gains at sale and stamp duty at purchase, which would apply if you sold the properties to yourself as an individual, the company should only be closed when you are ready to sell the properties. Once they have been sold on the open market, we are then talking about the simpler matter of withdrawing cash rather than offloading bricks and mortar.

These funds are typically treated as a capital gain taxable on shares at 20%, though it can be as low as 7.5% if you have a basic rate paying spouse who can withdraw dividends over an extended period. Another option, especially applicable to larger portfolios, is to wind the company up using an insolvency provider. As with much else in this guide, it is best to seek advice from a specialist before exploring this path.

I’m interested, but am I eligible?

In theory, anyone is eligible. It is not your personal situation but the status and circumstances of your portfolio, and what you intend to do with it, that matter. And that, importantly, can change. Investors need to be flexible in their strategy to succeed. Our advice is to speak to a tax expert and assess how incorporating might work for you.

The key takeaway from this series is that it is always worth considering your options before exiting the market. For many investors, incorporating through a company will not be ideal, but many more will dismiss or remain unaware of this strategy despite its tangible benefits. As this less well-informed cohort begins its exodus from the rental market, those who remain will reap greater rewards.

 

Disclaimer: tax advice is never one-size-fits-all. The government takes all circumstances and applications on a case by case basis, and so should investors. For help assessing your individual situation, seek bespoke advice from qualified experts.

We partnered with tax expert James Hume of Steel Tax London to create this series. Steel Tax can be reached at 020 3291 1943, or through their website: http://www.steeltax.london. If you have any questions for us about the contents of Tax Tuesdays, feel free to drop me a line at pavery@propertyfrontiers.com.

Author

Paul Avery

Paul joined us in 2016 to lead our in-house research efforts, producing reports and guidance for clients as well as the strategic market analysis behind our new project launches. His background is in sustainability in the construction sector, and he is currently being trained in property valuation to further bulk up his investment creds.
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