Category Archives: Tax

Should I move my buy-to-let properties into a company?

Since the former chancellor George Osborne introduced cuts to landlord tax relief thousands of landlords have seen their costs rise and are looking for ways to mitigate the hit. The limited company route was touted as the solution. So is it?

Here’s what the government has done as part of their buy-to-let clampdown:

  • Phased out mortgage interest that can be claimed against rental income. By April 2020 mortgage interest won’t be an allowable expense for individuals and instead, there will be a 20% credit. For 40% or 45% higher or additional rate taxpayers, this means an effective 20 or 25% tax hike.
  • Scrapped the wear and tear allowance.
  • Introduced a 3% surcharge on stamp duty payable on the purchase of buy-to-let properties or second homes.
  • Increased capital gains tax on residential property by 10% to 28% or 18% for basic rate taxpayers.

The key to the limited company question is the changes to mortgage interest tax relief and wear and tear. Landlords who own property personally pay income tax calculated on the rental income generated by these properties, not just on the profit they made after mortgage interest. When a limited company owns property this is viewed as a business and all expenses are tax deductible. Landlords can still take the income from the company in the form of a dividend, and will pay tax on this only.

Looking at it in its simplest form, a mortgaged property should be better off in a company. Indeed, thousands of landlords have now opted for this route – figures from Countrywide show a fifth of all buy-to-lets are now held by company landlords.

However, there are many considerations to think about. Here are some:

Costs of transfer

If you want to transfer property in your name to a limited company it can be very expensive. This transfer of ownership will trigger a sale and repurchase and incur stamp duty with the 3% surcharge on top. If the property has gone up in value since purchase there is also a capital gains tax hit. Plus there will be legal, valuation and mortgage fees.

Gifting land at nil cost to the personal company controlled by the landlord or close family avoids neither stamp duty nor capital gains tax.

Corporate costs

On the whole, mortgage rates for limited companies are higher and they incur higher fees than personal ones.

Mortgagors typically ask for personal guarantees from the owner-managers of small property businesses, so any benefits from the limitation of liability are lost.

Companies have running costs. They incur corporation tax, require accounts and an annual confirmation statement to be formally filed.

The tax savings made by having the company own the property would need to outweigh the additional costs and administrative burdens of running a company.

Your current and future tax position

If you are looking to supplement your income while you work, then you may be better off not buying through a limited company as you will be taxed twice – as well as paying corporation tax, you’ll need to pay tax on the money you take out of the company. Corporation tax rates are currently at 19%. Dividends are tax-free for the first £2,000 with subsequent dividend tax rates at 7.5%, 32.5% or 38.1% depending on the level of your other income.

If your property investment is part of a long-term investment strategy and you only want the income for the future after you have stopped working then a limited company is more likely to suit.

An overview of the main tax costs to consider to understand if setting up a limited company makes sense for you:

  Property held personally Property held through a limited company
Tax when buying a property Stamp Duty rates plus 3% surcharge. Stamp Duty rates plus 3% surcharge.
Rental income taxation Subject to Income Tax at your marginal rate 20%/40%/45%. Profits subject to Corporation Tax at 19%.

If drawing an income through dividends the first £2,000 is tax-free but dividend tax rates at 7.5%/32.5%/38.1% apply on top of Corporation Tax.

Mortgage interest tax treatment In 2018/19 you will be able to deduct 50% of costs from rental income before tax due, reducing to 25% next year.

By April 2020 mortgage interest won’t be an allowable expense for individuals and instead there will be a 20% credit

Mortgage interest is an allowance deductible expense.
Tax when selling a property Capital Gains Tax at 18/28%  –   depending on whether you are a basic or higher rate taxpayer after £11,700 annual exemption. Subject to Corporation Tax at 19%.
Other taxes   Annual Tax on Enveloped Dwellings applies to properties worth £500,000 or more. 100% lettings relief is available but a return must be filed.

 

The general view is that it can be very useful when you have a number of buy-to-let properties. For landlords with perhaps one property, it’s not worth it.

What’s clear is that you will need to do some thorough sums in order to work out exactly what difference going the corporate route will make to your finances.

To get some professional advice contact Shaya Grosskopf.

 

 


Employment and Self-Employment

A quick look into the complicated and increasingly fuzzy differences between employment and self-employment.

The tax position

Overall, the self-employed enjoy tax advantages compared to their employed colleagues.

  1. A self-employed worker pays lower rates of national insurance (at the time of writing: 9%, or 2% on earnings above £46,350).
  2. There is no benefit in kind tax on private use of business vehicles.
  3. Expenses which are wholly and exclusively for the purposes of business can be claimed as deductions against taxable profits, while employee expenses adds a further condition before they can be claimed – expenses must be wholly, exclusively and necessarily incurred in the course of their employment.
  4. Self-employed workers also have the cashflow advantage of paying tax due on their earnings in the tax year ending on 5 April in two instalments at the end of the succeeding July and January. Employees have tax deducted from their earnings when it is paid.
  5. Self-employed workers often have the option to direct the profits of their business to limited companies, which can have significant tax benefits.
  6. Self-employed workers can pay salaries to family members, reducing their own taxable profits, and utilising the family member’s tax-free personal allowance. The salary must be paid on a genuine commercial basis for actual services provided and must actually be paid. Employees would have no such flexibility.

However, the self-employed must go through the bureaucracy of completing a self-assessment tax return. In general, and with many exceptions, employees earning less than £100,000 do not need to complete a return.

What about the employer?

Hiring a self-employed worker rather than an employee has advantages to the employer too: –

  1. Employers pay employer’s national insurance contributions (currently 13.8% of gross earnings) and pension contributions (currently 1%) for most employees
  2. In theory, self-employed contractors have little or no employment rights in matters such as sick pay, paid holiday leave and parental or maternity pay.

Recent supreme court judgements concerning section 230 of the Employment Rights Act 1996 seems to grant protected “worker” status to the self-employed where “an individual undertakes to do or perform personally any work or services” including whistle-blower and unfair dismissal protections. This creates a fuzziness between

Commercial risk

Self-employed workers (other than those who trade through limited companies) are in business on their own account. The law does not distinguish between a creditor’s claims on their private and personal assets.

Self-employed contractors’ employment rights are curtailed as set out above.

However, employees also face significant risks. They may lawfully be made redundant with only a small entitlement to statutory redundancy pay if their employer’s business requires it.

Is self-employment a choice?

The courts have been consistently clear that merely signing a contract that states that an employee is self-employed does not automatically render that employee self-employed if the substantive relationship is one of employment.  The following factors are relevant to determining whether a relationship constitutes employment or self-employment

  1. Mutuality of obligation. This refers to the obligation of an employer to provide work and pay for it, and the corresponding obligation of the employee to personally do the work. However, the use of zero hour contracts, whose classification as employment has never been subject to doubt, does challenge this notion.
  2. A line managed worker carrying out a regimented task – particularly one carried out simultaneously by other workers such as a warehouse packer – is unlikely to be classified as self-employed. Skilled employees such as software developers enjoying substantial independence in carrying out their jobs are more likely to be construed as self-employed.
  3. Set hours and a set place of work are associated with employment.
  4. The right of substitution rather than a requirement of a worker personally carrying out work is a valuable indication of employment. HMRC have recently lost a case in which they sought to assert an employment relationship predicated mainly on a lack of right of substitution.
  5. Typical commercial arrangements such as the worker using their own tools, having multiple clients, and especially no one predominant clients, marketing their services widely, or obtaining their own insurance are indicators of self-employment.

Despite decades of different cases, exactly how these different factors are to be weighted is unclear.  Recently a number of examples have arisen of workers being granted employment rights while taxed as self-employed, which makes for a very confusing position for businesses looking to comply with the law.

Limited companies and LLPs

It used to be the case that using specific legal intermediaries – such as LLPs or companies – would make what would otherwise be an employment relationship into a contractor or self-employed relationship.

Members of LLPs are now taxed as employees unless they substantially participate in the risks, decision making, and rewards of the LLP’s trade.

Companies which provide services on what would otherwise be a contract of employment are required to pay tax as though they were an employee under the “IR35” rules. Exactly which types of relationship are caught under these rules is a complex and still evolving area of law.

 


Making Tax Digital

What is making tax digital for business?

It’s a government scheme to change the way that accounting information is recorded and transmitted to HMRC.

How does it affect my business?

The earliest impact on businesses will be the requirement for VAT registered businesses to file their vat returns using Making Tax Digital (MTD). This means that you will need to do your bookkeeping and vat returns on MTD compliant software, and you can no longer use the existing (free) HMRC website.

What do I need to do?

You need to work with your software provider to ensure that the software will be compatible with MTD. If your bookkeeping software will not be compatible, you will need to change providers.

Can I carry on using my existing bookkeeping software and just put summary totals into the MTD compliant software to file my return?

No. HMRC require that the MTD system must have digital access to the underlying transactional records. Automated (API) links between existing software and an MTD compatible system are acceptable and may be useful for individuals with specialised or excel software.

Typing in summary totals with your digits does not count as a digital link!

When does it start?

The changes take effect for VAT returns covering a period beginning on or after 1 April 2019.

How can SBPK help?

We are delighted to be able to offer you training on a variety of modern cloud and standalone systems which are compatible with Making Tax Digital.

We can help move your data over from legacy systems to newer MTD compatible systems.

We also provide a complete outsourced bookkeeping and VAT service which will of course be MTD compliant.


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