The ability of a company to save a landlord tax will depend on circumstances. However, recent changes in tax law have significantly strengthened the case for company ownership. Mainly since the March 2016 Budget, an investors’ overall exposure to tax has reduced on properties held in a company while it has increased for properties held privately.
Tax on gains for company owned property
Prior to the Budget changes, companies were rarely useful in saving tax for landlords because of the double tax charge. Any gain on property owned via a company is subject to corporation tax. When the proceeds are transferred from the company back to the investor the gain is subject to further tax. This is because the shareholder needs to take either a dividend or to dispose of a share in order to withdraw value from the company.
However, two recent changes have reduced the impact of the double tax charge. The rate of capital gain on a share disposal has reduced from 28% to 20%, for a higher rate taxpayer. At the same time, the rate of capital gains tax on residential properties owned personally has remained at 28%. As a further benefit, the rate of corporation tax is reducing from 20% to 19% on 1 April 2017 and is scheduled to reduce 17% on 1 April 2020.
The rate of tax on capital gains is 36%. This is the corporation tax rate of 20% on the disposal of property plus 16% capital gain on disposal of the share. The rate is 16% because the shareholders are paid out of after tax profits, i.e. 80% of 20%. The combined rate of tax will reduce to 33.6% if the government’s proposals go ahead. This company rate of 36% compares to a rate of 28% on property owned privately.
In summary, the rate of capital gains tax is still higher on company owned property. However, the savings in tax on income may outweigh the additional tax due on disposal. Moreover, it could be possible to mitigate the tax by a variety of strategies including emigration, distribution of proceeds among family members, reinvestment of proceeds in further property and pension contributions. Pensions cannot be used to hold residential property. However, a company in which profits and proceeds are invested into a pension could achieve exposure to the housing market with considerable tax benefits.
Currently, there is no restriction on the deduction of mortgage interest from rental property owned by a company. For a higher rate, or additional rate, taxpayer, a company could significantly reduce tax payable where loans have been used to finance.
It is possible to obtain tax relief on interest for a loan made to a ‘close’ company. Therefore, an investor could obtain a deduction from taxable income, such as employment earnings, for a loan made to a company for the purpose of buying a property. This is a further benefit since:
Tax relief on interest is obtained, regardless of the profitability of the company.
This form of financing facilitates accumulation of funds in the company, which could carry a further tax benefit as explained below.
Lenders are more favourable about writing out loans to individuals. In broad terms, the legal structure of company increases risks for its creditors as compared with lending to an individual.
The amount of tax relief on interest could be capped for investors with total income in excess of £200,000.
A dividend allowance of £5,000 per person was introduced following the March 2016 Budget. A higher rate taxpayer with no other dividend income could withdraw net rental profits of £5,000 per year with no personal tax liability. To illustrate, a husband and wife co-owning a property could draw a profit of £12,500 a year and pay £2,500 in tax. This compares with £5,000 if the same property is owned individually.
Rather than withdrawing funds in excess of the dividend allowance, the remaining profits could be left to accumulate in the company. Once the company is eventually ended, the store of cash profits can be withdrawn as a capital distribution with significant, resultant tax savings. As explained above, profits would be 36%, or lower if rates of corporation tax fall as expected. This compares with a rate of 40%, for a higher rate taxpayer, on profits from privately owned property. Furthermore, the cash saved by delaying tax could be used to repay mortgage or make further investment.
Property which is transferred on the death of is owner is not subject to capital gains tax. For the beneficiary any capital gain will be calculated as the difference between the value when the property was inherited and when it was eventually disposed. It could be said that death creates a, capital gains tax free, uplift in value. It can therefore be tax efficient to retain property until death. Property which is disposed of less than seven years prior to death could be part of the deceased’s estate. An asset which is transferred less than seven years prior to the owner’s death could be subject to both capital gains tax and inheritance tax.
Retaining property until death could result in a greater overall exposure to tax where it is held in a company. If the beneficiary disposes of the shares in the future the cost of the shares would be set by market value when the property when inherited. To this extent capital gains tax is avoided in the same way as for property owned privately. However, tax on disposal of a company owned property has two elements. The underlying asset will still be exposed to corporation tax. Corporation tax on any gain is established by when the company disposes of its property and not by the date that any of the shareholders transfer their interest.
If structured more carefully however, a company could be used to avoid rather than increase exposure to inheritance tax. A rental property could form too great a part of a person’s wealth to impart as an outright gift to a single beneficiary. A company provides a common structure for shares in the asset (and the income this asset generates) to be gradually passed to children, grandchildren and other beneficiaries in a controlled manner. Given the punitive tax rates applied to trusts, a company could present a more practical method of achieving what in effect used to be the function of a trust.
For a couple, it could be beneficial to own the property in join names to make use of double the dividend allowance each year. For a married couple the ratio in which a property is owned determines the ratio in which rental profits are taxed. However, liability to income tax for company owned property will reflect the amount is shareholder is entitled to be paid. In a company it is possible to establish an alphabet share structure to ensure maximum flexibility about the allocation of dividends. It may be possible to increase dividends to the spouse taxed at the lower rate, without altering ownership in the underlying asset.
It is not recommended to transfer an existing property to a company. The transfer will be treated as a disposal for tax purposes. Therefore, capital gains tax would be payable on the difference between market value and original cost. Even for property that has no taxable gain, stamp duty of at least 3% would probably be payable by the company.
The company structure is best suited for properties that are expected to produce an income rather than a capital gain. This would apply to properties expected to return value through higher yield than through growth in market price.
A company would provide a further tax advantage to a landlord using borrowings to support their investment.
A plan should be put in place to avoid holding the shares on death.
Relevant changes in tax regulation should be closely monitored, and plans adjusted accordingly. An exit strategy should be prepared.
Use the ISA allowance. Up to £15,240 can be saved tax free in an ISA. From 6 April there will be no tax on the first £500 of interest, or £1,000 of interest for basic rate taxpayers. Take into account maturity dates on bonds so as to minimise tax on savings income.
Consider increasing expenditure and building up work-in-progress prior to the year end. Corporation tax rates are unchanged in 2016/17. Therefore, lower profits this year will delay the due date for tax.
For taxpayers with an income (before deduction of pension) of £150,000, the annual allowance will be decreasing. In some case the allowance could be as low as £10,000.
A taxpayer can bring forward unused allowance for the preceding three tax years in determining the total amount of contributions that would obtain tax relief.
For contributions prior to 5 April 2016, allowances for tax years, 2014/15, 2013/14 and 2012/13 can all be taken into the calculation. The allowance is used up by both employer and employee contributions. The allowance was £50,000 for 2013/14 and 2014/15. It is £40,000 for the current tax year and 2014/15. A total of £180,000 of current year and brought forward allowance is available prior to 5 April 2016.
The rate of income tax on dividends prior to 6 April 2016 is 0% basic rate and 25% higher rate, whereas after 6 April is 7.5% basic rate and 32.5% higher rate.
However, from 2016/17 the first £5,000 of dividends is tax free. Review the effect of increasing dividend payments. It is not necessary to make the physical bank transfers prior to 5 April 2016. A person who is both shareholder and director can retrospectively declare a dividend. Therefore, if it turns out that the amount that a shareholder has withdrawn from the company is less than optimal for tax purrposes, it is possible to increase 2015/16 dividends with proposed dividend.
A dividend, however, is at least the amount that the shareholder has withdrawn from the company. Withdrawals are typically represented in the main by transfers from the company bank account to the owner’s personal bank account.
Profit extractions for the company should not exceed corporation tax. It is a requirement to have retained sufficient funds in the company bank account at the year end to cover corporation tax.
A further method for avoiding the new rates of dividend tax is to retain profits in the company to be withdrawn as capital when the company is struck off. The retained profit would then be taxed at 10%, even for a higher rate taxpayer. This however relies on the system that allows this option being the same in the future tax year in which the company is wound up.
It is also rarely practical to dispose of a company while still trading, and so the lower tax treatment would only emerge as an option when there is a substantial trading break. Another tax efficient method for extracting profit is via pension contributions.
The wear and tear allowance is due to be abolished from 6 April 2016. Consider delaying the purchase of replacement furniture until after 5 April.
In broad overview the UK tax regime for company cars is not favourable. The tax system discourages the use of cars, with the aim of reducing pollution and congestion. The trend has been an increase in the tax burden to deter the use of cars, and there are no indications that this trend is set to alter. Consequently, businesses should consider tax implications carefully in any plan about financing of motor costs.
The tax implications for a sole trader or partner using a business vehicle are more straightforward. All of the running costs are deducted from taxable profits and a percentage of the original cost is deducted each year. This form of tax depreciation is referred to as a capital allowance. Where there is private use of vehicle, the deduction from taxable profits for running costs, and for capital allowances is restricted accordingly.
The position for a limited company is that all motor costs are deducted from taxable profits, even if there is non-business use of the vehicle. Where there is private use, the employee is treated as receiving a benefit, and taxed accordingly. Capital allowances are deducted from profits to provide tax relief for the original cost of the vehicle.
The amount of benefit taxed on an employee is often much higher than the cash equivalent of providing the car. For this reason, business cars are usually cheaper for sole traders. Directors often use the mileage allowance instead.
Interest on a general business loan is fully deductible from profits, whereas car loan interest would be restricted based on any private use of the vehicle. Therefore, partnerships and sole traders should consider the tax efficiency of financing arrangements required to meet motor costs.
A capital allowance is the amount of the purchase price of an asset which can be deducted from taxable profits each year. It applies to cars that are purchased outright, or via hire purchase. It does not apply to cars which are leased.
Cars with CO2 emissions in the highest tax band, will be put into a special rate pool. Written down allowances on the special rate pool are 8% and on the main pool are 18%.
For unincorporated businesses (sole traders and partnerships), cars are put into a separate pool if there is private use. This is not required for companies, since the full writing down allowance is deducted on vehicles with mixed private and business use. Employees and directors are subject to tax on the benefit of private use.
In general, when an asset is disposed of the tax depreciated value, known as the written down value, is compared with sale proceeds. The difference is either added to tax, called a balancing charge, or deducted from taxable profits, referred to as a balancing allowance.
Regardless of whether a car is in a special rate pool or main pool there is no balancing allowance (or balancing charge) when it disposed of. The absence of a balancing allowance is a significant drawback. In effect, it means that full tax relief for the purchase of the car may not be fully obtained until years after it has been sold or scrapped.
There are three reasons that a balancing allowance could be accelerated:
Pools with a balance of less than £1,000 can be written off in full.
When the business ceases the written down value is compared to market value of assets giving rise to a balancing allowance or charge.
A car which is used privately by a sole trader is placed in a ‘single asset pool.’ (The single asset pool facilitates a calculation of the capital allowance restriction for the proportion of non-business use.) A balancing allowance or charge on a single asset pool is calculated when the asset is disposed of. Quirkily therefore, a partner or sole trader may get tax relief faster if there is some private use of the car. Companies do not have single assets pools because there is no adjustment to capital allowances for private use by an employee or director.
Providing an employee with a car for private use is treated as benefit in kind. The amount of benefit is calculated by multiplying a percentage by the list price of the car. The percentage is based on CO2 emissions, as explained in a separate guide about the car benefit charge.
The employee benefit-in-kind is taxed the same way for a car that is bought as it is for a car that is leased.
The main tax implications of leasing as a form of finance are therefore about the deduction of VAT, and comparing capital allowances with lease deductions.
Where a car is purchased, or acquired via hire purchase, VAT on a vehicle cannot be reclaimed unless:
It is a car and used exclusively for business. The definition of private use is discussed in a different section, but so restrictive that most company cars would probably not be treated as business vehicles for tax purposes.
It is a commercial vehicle, such as a van, or it is a motorcycle.
Certain cars provided to people with disability can be zero rated for VAT.
If the car is leased, a VAT registered business can reclaim 50% of the VAT on lease costs. In the rare instance that the vehicle is not available for private use, 100% of VAT on lease payments can be recovered.
VAT on maintenance payments and other running costs will be tax deductible in full. Special rules apply to VAT on petrol.
Where an employee uses their own car for business travel, the employee’s taxable income can be reduced for business miles travelled according to the mileage allowance. The advantage about this arrangement is that it avoids the tax and national insurance implications of a taxable benefit. There are also administrative savings because a mileage allowance is simpler to calculate. Using a privately owned vehicle is often the preferred route for company owners.
Contract hire and daily rental
Leasing can be separated into two types for the purposes of taxation: car rental and finance leasing.
In practice, a contract hire, involves an arrangement lasting about two to three years in which the car and all other costs are covered by an agreed monthly payment. The car is returned to the lessee at the end of the agreement, and subject to the car being in good condition and not having exceeded a set number of miles, there are no further payments due. Car rental is usually for a shorter period such as a day or week. Under car hire arrangements, the full rental is deducted from business profits as the cost is incurred.
The definition of business use is the same regardless of whether the car is owned, leased or rented by the company. Therefore, a taxable benefit arises on the provision of a hire car to an employee for private use.
A hire car which is a replacement for a company car made unavailable for a period of 30 days or less is not a taxable benefit provided to an employee. However, it should also be noted that a car benefit is reduced to cover a period where the car is unavailable, provided that period is at least 30 days. Consequently in many cases, the provision of a replacement hire car will not affect the benefit on which an employee is assessed.
A finance lease requires the lessee to cover all the running costs of the car. However, it differs from a hire purchase agreement because the car is not the possession of the lessee at the end of the agreement.
A business cannot claim capital allowances for a leased car, because it does not own the vehicle. Instead, the cost of the lease payments are deducted from profits as they are incurred. For cars with CO2 emissions over 130 g/km, the deduction from taxable profits is restricted to 85% of the lease payment.
Where there is private use of a leased car, the lease payments are deducted from profits, but the employee will be treated as receiving a benefit. This benefit is calculated based on list price and CO2 emission of the vehicle in the same way as for cars which are owned by the company.
Even though legal ownership remains with the lessor, generally accepted accounting practice (GAAP) requires that the leased vehicle is included on the balance sheet of the company.
Under a hire purchase agreement, capital allowances are applied to the full value of the car from the start of the agreement. Tax relief on hire purchase payments are more closely matched with cash flows as compared with outright purchase.
Vans and motorcycles
For tax purposes, the definition of cars, excludes both vans and motorcycles. Therefore, the full cost of a van or motorcycle can usually be deducted from taxable profits in the year of purchase. This is because the annual investment allowance can be allocated to these types of vehicles.
If there is incidental private use, or just commuting no taxable benefit arises on the provision of a company van. If the van is made available for private use, there is a van benefit and van fuel benefit charge, however this is typically much lower than the charge for a company car.
If there is a significant level of private use of company motorcycle, 20% of the market value is assessed to the employee as a benefit in kind each year.
HMRC have stipulated that a vehicle would have no private use if the car is neither used for private purposes nor is allowed to be used for non-business purposes.
This means that there would be a benefit in kind if the car could be used for private purposes, even if it not so used.
As a practical step, it would be more straightforward to demonstrate that private use was prohibited if the car was only insured for business use. However, the courts have explained that no private use must be expressly stated and be capable of being enforced. A term within an employment contract should meet this requirement.
In practice the following should be noted that ordinary commuting is not treated as business use. Ordinary commuting takes place for any journey to a workplace where:
The employee spends more than 40% of working time
The employee has worked, or is expected to work, for longer than 24 months.
If there is no ‘ordinary commuting’, then, the courts have decided, leaving a car outside the home of the taxpayer would not in itself amount to private use. No journey of a person who mainly works from home would be ordinary commuting.
Private use. VAT purposes
The definition of private use is the same for VAT purposes. The vehicle cannot be available for private use, nor should be used privately.
However, for car hire, HMRC have agreed that, private use will be ignored where the period of hire is for 10 days or less. Provided the car is hired for business purposes, weekend and evening use will be ignored, following the HMRC concession. As a result, 100% VAT can be recovered for short term hire of a car.
No taxable benefit arises from the use of a pool car. A pool car is a car that is:
Used main for business journeys, with any private use being merely incidental
Not normally kept overnight near the home of any employee
Not normally used by one employee to the exclusion of others.
Use a hybrid car.
If purchased, the full cost of a car will be can be deducted from company profits in same year of purchase if CO2 emissions are 75g/km or lower. This contrasts with annual tax depreciation (capital allowances) of 8% or 18% otherwise.
If obtained via hire purchase, the full cost is deducted from profits in the year of purchase. However, the payments are usually spread over a period of longer than a year. Hire purchase provides a cash flow benefit over alternatives. However, the cost is usually higher to factor in the cost of financing. Loan interest is tax deductible.
If leased, the full cost cannot be deducted from profits in the first year. The lease payments are deducted from company profits as they are incurred. Unlike purchase or hire purchase, 50% of VAT can be recovered.
100% VAT cannot only be recovered if the can is only available for business purposes. In practice, business only insurance may be a minimum for meeting this requirement.
For VAT exempt and non-VAT registered businesses, outright purchase is preferable.
The benefit in kind of a company car is 7% of its value, where CO2 emissions are below 50 g/km. This applies to electric and many hybrid cars. For a car with a price of £20,000, the annual benefit would be £1,000. A form P11d will need to be completed each year, which adds to the compliance cost.
The business of a sole trader, or partnership, will have less tax exposure than a director, or employee. This is because there is tax to pay on benefit-in-kind for a company, but not for a partnership, or sole trader business. For company owners, the benefit can be avoided by either:
Acquiring an electric or hybrid fuel car. The benefit is not entirely avoided by signifcantly reduced.
Where neither of the above is practical, it is better for the motorist to reimburse the company for the use of fuel. Unless consumption is far higher than average the tax charge for the provision of fuel will be higher than the cost of fuel reimbursement using the approved HMRC rates.
There may be little tax advantage to hire purchase or leasing arrangements as compared with outright ownership. This is because both options will still create a benefit in kind.
However, if business use is only an occasional requirement, ad hoc daily rental could avoid a taxable benefit arising. Furthermore there are VAT advantages, as explained in the guidance about private use for VAT purposes.
Even if there is private use of a hire care, the taxable benefit will be reduced according to the number of days in the year for which the rental car was available. In practice, a business is less prone to keep a hire car for any longer than it is required where it offers fewer hassles to be rid of.
The tax savings of a car for non-business use may justify the purchase of two cars, say with one which is insured only for business purposes.
A finance lease allows greater scope for VAT relief than purchase or hire purchase of a car.
Except for car with CO2 emissions with 75 g/km or less, the tax deduction of a leased car tends to correspond more closely with the loss in value of the car. The tax write off for a leased car is not restricted by the capital allowance rules as the write off is for purchased cars. Depreciation is factored into lease payments and deductible from tax adjusted profit.
Consider the use of a van or motorcycle as more tax efficient alterntaives to a car.
With tax on both company profits and o the extraction of company profits, the purchase of car presents an alternative for reimvesting profits. With careful planning and perhaps some compromises an economic outcome can still be achieved.
Historically, company ownership has not been a popular option for landlords. Gains on disposal of property are potentially liable to both corporation and capital gains tax. However, given the rules that will be introduced for landlords on restricting mortgage interest tax relief, and on the taxation of dividends, new opportunities have arisen for tax saving in a few, limited situations.
Capital gains tax on transfer of property from private to company ownership
Landlords owning property with pregnant gains are likely to pay tax sooner, and pay more tax overall as a consequence of transferring property into a company.
The transfer of a property into a company gives rise to a disposal for capital gains tax purposes. The gain is based on the market value of the
property on the date of transfer. Consequently, the transfer of existing property could give rise to substantial capital gains tax (CGT) liability. Because no money changes hands on transfer of the company, it is possible that the cash is
not available with which to meet the CGT liability to HMRC when it falls due. An instalment option can be reached with HMRC, where the transfer of property is effectively treated as a gift to the company (following section S281 TCGA 1992.)
If the property falls in value after the transfer into the company, capital gains tax has effectively been calculated on the property with a higher value than the amount for which the property was eventually sold. In this situation a capital loss
would arise. However, a capital loss in a company can only be used to reduce future capital gains. If there are no further capital gains, the loss is wasted. In summary, the above scenario could result in more tax payable through company
ownership than if the property remained in the hands of its original owner.
Under Section 162 Taxation of Chargeable Gains Act 1992, it is possible to claim ‘incorporation relief’, and thereby defer capital gains tax on transfer of the property to a company. In order for the relief to apply it has to be demonstrated
that a ‘business’ was transferred. In a recent leading case “Elizabeth Moyne Ramsay v HMRC ” it was decided that the owner of a block of flats had transferred a business and therefore qualified for incorporation relief.
Following this case, HMRC have stated that there has to be some degree of activity in the rental business in order for incorporation relief to apply. However, HMRC have not been more specific. In the Ramsay case, the landlord spent more than
20 hours a week attending to her properties. Where a landlord has a single property or uses a letting agent, it is highly doubtful that HMRC would regard the company activity as other than investment.
Most landlords hold one or two investment properties, and therefore incorporation relief is rarely applicable on transfer of a residence to a company.
Capital loss on transfer of a property to a company
Where a property stands at a loss, transfer to a company presents an opportunity for the loss in value to become a ‘taxable loss’. For instance, if a person makes a gain in a tax year, but also has a property which is worth less than
it was acquired for, then transfer to a company provides an opportunity to mitigate capital gains tax without having to dispose of a loss-making property.
Where the property owner will be the shareholder of the company, transfer to a company will give rise to stamp duty land tax based on the market value
of the property at the time of transfer. The tax applies regardless of any cash or other consideration received by the owner in return for the property.
Where property is owned by a partnership it is possible that no stamp due will arise on the transfer. However the partnership would need to be
carrying on trade and not merely holding investment property.
Often the purpose of a transfer to a company is for the company to eventually sell the property. However if, for any reason, the company returns the property to its original owner, this event would potentially give rise to further stamp duty land
Initial purchase of property by a company
Where a property is purchased directly by a company, rather than transferred by a shareholder, the stamp duty and capital gains tax implications discussed above would not be at issue. Stamp duty would be payable by the company, but it would not
be effectively paid twice by the same owner.
In practice, mortgage providers will typically offer financing to a company on less favourable terms than to an individual. The decision to purchase a property via a company should include an assessment about the availability and cost of finance.
Early redemption charges may apply on transfer of a property to a company.
Eventual disposal of the property
Entrepreneur’s relief is not available on disposal of shares in a company owning residential property. A property letting business does not meet the definition of a ‘trading’ company for the purposes of entrepreneur’s relief.
The main drawback of the company ownership is the ‘double tax charge.’ First, corporation tax would be payable on any gain in the property. Second, capital gains tax would be payable when the company is closed and the proceeds
are withdrawn by its owner.
To take an example, say a director adds £400,000 to a company in mortgage and their own funds to purchase a property and later sells the property for £500,000. After the sale, the first £400,000 would be paid back to the director
and mortgage provider with no tax implication. The increase in value of £100,000 would be subject to corporation tax, say at 20%. Let us say that the owner decides to liquate the company following the sale, because capital gains tax
on disposal of the share results in less tax than income tax on dividends. The remaining £80,000 would then be subject to capital gains tax. If the shareholder has available annual exemption of about £11,000 and is subject to
tax at 28%, there is further tax to pay of £19,320. The overall tax is about 40%. This compares to tax of less than 28% if the property is held personally.
Deduction of interest from taxable profits
Company ownership has received renewed interest in response to the rules introduced in the July 2015 Budget. The new system, which will be gradually
introduced between 6 April 2017 and 5 April 2020 will not permit mortgage interest to be deducted from taxable rental profits. In its place a 20% tax reducer will be applied to the amount of mortgage interest. The effect is that, from 6 April
2020, a higher rate taxpayer will receive on 20% tax relief on mortgage interest where that same person received 40% or 45% previously.
Provided the mortgage is for the purpose of the business, there is no restriction on the deduction of mortgage interest from profits for corporation tax purposes. However, corporation tax rates are 20%, reducing to 19% by 2017 and 18% by 2020, which is the same or lower than the basic rate of income tax. As a consequence, the comparative tax advantage of company ownership rests on the tax
efficiency of extracting profits for higher rate taxpayer.
Income tax on drawings of company profits
From 6 April 2016, the first £5,000 of dividends are tax free, and therefore tax savings can be achieved. The dividend rate will be 32.5% for a higher rate taxpayer and 38.1% for an additional rate taxpayer.
The tax savings are therefore only applicable on the first £5,000 of profits. For every extra pound of dividend paid over the £5,000 allowance, 46 pence in tax is paid for company rental profits where 40 pence is paid for non-company
profits. When profits reach a certain level, it will become more expensive, rather than less expensive to receive rents from a company.
As a point of clarification, a landlord who is a higher rate taxpayer will pay 46% in corporation tax and income tax on dividends over the £5,000 threshold. This compares with 40% payable on rental profits for property owned privately.
The difference is 45% and 50.5% for an additional rate taxpayer.
The comparison ignores the deduction of mortgage interest. If the property is mortgaged, a higher rate taxpayer will be better off receiving rents from a company well after dividend have exceeded £5,000.
In an example where a landlord has £5,000 of dividend from other investments, his tax position on £10,000 of rental profit would be £4,000 on property owned privately and £4,600 if owned via a company. This is if the landlord
is a higher rate taxpayer and has taken all profits out of the company as dividend. In another example where gross rents are £14,000 but mortgage interest is £4,000, a landlord who is a higher rate taxpayer would pay the same £4,600
on company owned property, but now £4,800 on privately owned property.
It is not straightforward to summarise whether company owned property will save tax. However, if rental profits are less than the available dividend allowance, then there is a clear tax advantage for a higher rate taxpayer. If the property
is mortgaged then the tax efficiency of company ownership improves.
For a basic rate taxpayer, there is less likely to be any tax to be saved by owning property through a company. However a company could be used to allocate profits to a lower earning spouse. For privately owned property the income sharing
ratio and capital sharing ratio is the same for all owners. However, through the allocation of different classes of share, it is possible to allocate company dividends so as to produce the most tax efficient outcome.
Dividends paid to a shareholder’s child, in excess of £100 per year, would be assessed to the parent. This applies to a childe who is under 18 and unmaaried.
Inheritance tax implications
Disposal of a property, during a person’s lifetime carries a risk that the lifetime gain on the property will be subject to capital gains tax, and that the value of the property in the estate will give rise to death duties. This would occur in the situation where a person suffers capital gains tax on the transfer of a property into a company of which that person is a shareholder.
When a person dies, there is no capital gains tax on any increase in value of property held in the estate. Consequently, it is more tax efficient for a property with pregnant gains to form part of an estate, than for the after-tax proceeds from
the sale of this property to form part of the estate. In the former case, capital gains tax has been avoided.
Given that the exposure to capital gains tax is higher for property owned in a company, the potential for tax saving is also greater.
Death creates a capital gains tax free uplift in value. Therefore probate value, rather than original cost, will determine the gain on which the beneficiaries would be liable, on eventual disposal of the property.
A company owned property could be a tax efficient method of passing wealth to family members. One arrangement could be the allocation of lifetime rental profits to a spouse, and the passing of this property to children on death.
The ownership structure of the company is best established at the outset. Once the company owns property, the stamp duty and capital gains tax implications of any share restructuring will be at issue.
Annual tax on enveloped dwellings
A residence which is owned by a company or partnership and valued at more than £1 million, or more than £500,000 from 1 April 2016 will be subject to the annual tax on enveloped dwellings or ATED. The annual charge is £7,000 for
properties worth between £1 million and £2 million and rises in stages until the charge reaches £218,200 for properties worth more than £20 million.
From 1 April 2016, the annual charge will be £3,500 a year for properties worth between £500,000 and £1 million.
A landlord who lets property at a commercial rent, and where the tenant is not connected with the landlord will be entitled to full relief from the charge. The ATED charge was introduced as an anti-avoidance provision for non-UK domiciled individuals
using companies to mitigate their exposure to UK inheritance tax.
In summary, where rental profits are comparatively low and there is no expectation of capital gain, a company can carry some tax advantage over personal ownership. By the same token, the additional accounting cost of a company structure is likely
to be at issue where rental profits are lower. The cost of financing should also be considered. The transfer of an existing property into a company could give rise to stamp duty and capital gains tax.
Company owned property could form part of inheritance tax planning. Changes to the tax rules poses a particular risk to lifelong tax planning, particularly in view of the capital gains tax exposure on withdrawing property from the company during
the owner’s lifetime.
For higher value residence the annual tax on enveloped dwellings should be considered if the property is not let.
The usual situation is that most of the costs incurred by an employee in carrying out a job will
be met by the employer. Typical expenses include the provision of an office space, office facilities, computer equipment, work telephone and stationery. The costs mostly commonly met by an employee include business attire, commuting and lunch.
Clothing, food and commuting are not deducted from taxable employment earnings, except in rare and exceptional circumstances.
If the costs are not met directly by the employer, it is usual practice for the expenses to be reimbursed. However, where an employee settles a work related cost from their own pocket, tax relief may be due. For tax relief to be available,
the costs should be incurred wholly, exclusively and necessarily in the performance of employment duties. This is a restrictive requirement.
Employees’ contributions to a registered, occupational pension are deducted from taxable earnings. Most employees now make a contribution as a fixed percentage of earnings following the auto-enrolment requirement. Additional contributions up to an annual limit are also tax deductible.
Subscriptions to professional organisations could attract tax relief. The subscription must relate to the employment, and be made to a professional organisation approved by HMRC. A list is shown on the HMRC website. Entrance fees are
not tax deductible.
Equipment and tools
Equipment provided by an employee is deducted from taxable earnings. The equipment will obtain a capital allowance, which in practice means that
the whole outlay can be deducted from earnings when incurred. Equipment for this purposes does not include cars, bicycles or motorcycles. As an alternative to actual costs, a flat rate deduction can be made from profits according to the rates
published on the HMRC website. If the flat rate deduction is made a record does not need to be kept of the actual cost.
Donations made through an approved payroll giving scheme are deducted from gross pay. There is no limit to the amount of donations which obtain tax relief.
Employee’s liability insurance premiums
Most employees are covered by the employers’ group policy. However, in the less common situation that an employee meets the cost of liability insurance, this cost can be deducted from employment earnings subject to tax.
Employment related travel
Tax relief can be obtained on necessary travelling expenses excluding ordinary commuting. Therefore, an employee cannot deduct the cost of travelling
between a permanent workplace and:
The employee’s home
A place not related to the employment.
The workplace of a different employer.
A permanent workplace is a where an employee has worked, or is expected to work, indefinitely, or for a period of more than 24 months. A permanent workplace is also a place where the employee spends 40% or more of their working time. For instance,
if an employee is posted one day out of a five day week to a different location, travel to the location will be tax deductible. Even if the workplace has not changed for more than 24 months, provided time spent at that work place stays less than
40% of total work time, the workplace will not be treated as permanent.
An employee can only have one permanent workplace at any time.
Accommodation and subsistence
Accommodation and subsistence while an employee is away from home on business travel is tax deductible. Provided the cost is reimbursed by the
employer, other incidental costs of staying away from the office overnight are also tax deductible up to a limit of £5 within the UK and £10 per night for stays outside the UK. Where a reimbursement exceeds the limits, the whole amount
of reimbursement will be taxable. An example of incidental costs could fall into the categories of laundry, telephone and newspapers.
With heavy taxes for both employee and employer on most company cars, it is increasingly popular for employees to use a privately owned vehicle for business
travel. The cost of using a privately owned vehicle, up to the mileage allowance can be deducted from taxable income. Any amount paid
by the employer over the allowance is taxable. If the employer pays less than the allowance, this shortfall is tax deductible.
As any exception, any shortfall in reimbursement of passenger payments are not deductible. An employee claiming mileage allowance can also deduct the additional cost of parking, congestion charge and toll gate costs. The employee may not also
deduct actual motor costs, such as: petrol, insurance, road tax, MOT, servicing, the cost of the car itself and interest on a car purchase loan.
As an alternative the cost of hiring a car for business journeys is tax deductible. The car would typically be used exclusively for business where the hire period is a matter of days. Otherwise there could a restriction on the amount of costs
which can be deducted from taxable income.
For a UK resident, the costs of travelling to take up employment overseas, and the costs of travelling from overseas on termination of that employment,
are tax deductible. Related accommodation costs which are paid for by the employer, or reimbursed by the employer, are not a taxable benefit.
Two return trips, maximum, for spouse and minor children per tax year to visit the overseas employee are deductible. This is on the condition that the employer bears the cost and that the employee works abroad for 60 continuous days.
Up to five years after arriving in the UK, a non-domiciled employee, can deduct the cost of travelling between the UK and the place where the employee
normally lives. The condition is that the employer reimburses the cost or covers the travel costs directly. The expenses relief would apply to the cost of relocating to the UK to take up a relevant employment. Up to two return journeys
per year for any spouse and minor child of the employee are also tax deductible. This is provided the employee works in the UK for a period of 60 continuous days.
Working from home
If an employee works from home, a deduction can be made from tax. There is no requirement to substantiate a claim of up to £4 per week. It is necessary to keep records in support of an expense deduction of more than £4 per week,
or £18 per month. Only the extra cost of working from home can be deducted. Incremental costs typically include the additional expense of light and heat for the premises, of a business telephone and of special office furniture.
Where there is mixed business and personal use, such as for rent or mortgage interest, an apportionment cannot be made. The scope for obtaining tax relief for use of home as office costs are greater for a self-employed individual than for an employee.
In general clothing costs cannot be deducted from taxable earnings. The restriction includes business attire, such as suits, even if only worn for the office. As an exception, clothing required for health and safety purposes and uniforms are
If client entertaining is provided, either the expense will be disallowed in the computation of business profits, or it will be treated as taxable income of the employee.
If the employee carries out business entertaining, and the expense is disallowed in the calculation of taxable business profits, then the employee can deduct the expenses from their taxable employment earnings. Following the general rule, any reimbursement
of expenses would be treated as income. Thus, the reimbursement is taxable, even though it has been disallowed in the calculation of taxable business profits.
Business entertaining is where the purpose of the entertaining is to discuss a business project or engender a business connection.
Where an employee incurs expense on non-business entertaining there is no tax relief, just as there is no tax relief for payments towards other non-business costs.
Any reimbursement made to employees for business entertaining is reported on form P11d. The requirement to enter a cross simply indicates that the employer has read the guidance and understands that the entertainment expense cannot be deducted from
profits, even if reimbursed to the employee.
For an expense to be tax deductible it has to be necessarily incurred. This means that it is a cost which every employee would have to suffer. The rule has been interpreted strictly by the courts. Consequently, the following are not
deductible from earnings:
Many of the costs of employment are typically covered by an employer, and these are addressed in the related guide on non-taxable benefits (pending).
How to claim
Expense claims for part of a Tax Return where the individual files a Return. For individuals who do not file a Return, the claim is made on HMRC form P87. A claim for overpayment relief can be made any time up to four years from the end of
the tax year during which the expense was incurred.
Your initial meeting at our office will be free of charge.
Weekdays 9am to 5.30pm Saturdays 10am to 1pm.
There is free parking outside the office. We are located close to Lordship Lane (accessed via the South Circular at the south end and via Denmark Hill at the north end.) Heading north take the right exit off Lordship Lane to North Cross Road and carry straight on to Upland Road
The office is served by Bus routes 40, 176, 185 and P13 along Lordship Lane. Stop at North Cross Road. Bus routes, 363, 63 and N63 to Peckham Rye. Stop at Barry Road. Bus routes 12 and 197 to Barry Road. Stop at Upland Road. Bus route 37 via Lordship Lane is close. Many of the buses above go via Elephant and Castle, Northern Line exit.
Nearest Train station is East Dulwich, Zone 2. The trains take 12 minutes to reach London Bridge and run about once every 15 minutes. Peckham Rye is close.
The East London Line to Forest Hill ia a short bus ride away.
The office is 4.8 miles to Trafalgar Square. Roughly 1 hour 30 minutes at a medium pace walk.