How do I become more tax efficient

Hello for the last 10 years I have been paying 40% tax on my properties profits, if I setup a limited company and get all the tenants to pay into that company with that account deducting all expenses can I pay 20%? Inland revenue currently add my day job salary + profit from my property and it’s now starting not even break even. How do I become tax efficient?

Ask an accountant!

Someone else in this community thought it was not worthwhile - see if you can find their entry.

If you have a portfolio of properties it may be worth while, but for one property it is doubtful?

If you want to work this out for yourself, knowing your current costs and income, it should be relatively easy to work out what you may get with a limited company, once you have done your research:

Annual Company House return cost =
Book-keeper & Accountant Fees if you use them =
Software for keeping track, if you pay for this =
Annual repair, maintenance, etc. and sales costs (average over 5-10 years) =
Initial setup cost, amortised over a year or more (may be tax deductible, may not) =
Pay your self zero, or a salary well below your personal allowance (£12500 last year) =
Pay N.I. contributions on your company salary =
Your company also is an Employer paying N.I. too =
By law you need a company pension - make this your property, but it still involves a cost to register this as your company pension (and annual cost to report on it?) =
Deduct the above from your rental income to provide gross profits =
Company Tax rate (on ???) =
Pay your self dividends = gross profits less company tax = company profit
Personal Tax on company dividends (First £2000 is tax free) at 7.5% =
What is left is your company profit: no further tax deductions, apart from tax on your company salary if over the personal allowance.
Regular Job only income is reduced by personal allowance, etc with the remainder being taxed at 20% or more.
Add regular job only income to company profit and company salary after company deductions. Is that greater or less than at present? Decide.

Clearly I don’t know enough. With research and guesses you can give your self a crude idea by working through the above.

Having looked up other costs for your self, what I can say is that when I looked at this a year ago I came to the conclusion regarding National Insurance costs, wrongly perhaps for 2018-2019, that they are worked out as follows:
Employee N.I. cost = (0% x first £6,032) + (12% x on next amount {£8,424- £6,032}) + (2% x on remainder of {£26000-£8,424}) = £638.56 if your salary were £26000.

Employer N.I. cost: Assume the above formula with 12% and 2% both replaced by 13.8%

Basic tax rate in England & Northern Ireland = 20% Up to £37,500

First £1000 of interest earned from banks, etc. is tax free. Anything above is taxed at 10%

From April 2020, no ‘mortgage interest’ costs will be deductible.

That is all I know. Can’t help further. However, it is clearly a complicated area: I cannot recall which website I got the following comments from, but it was by someone like your self trying to reduce their tax burden and this is what they basically wrote, as copied to my notes:
" 1. From April 2020, no mortgage interest costs will be deductible. Instead you will receive a 20% tax reduction on whichever is the lowest of the following:
* Your finance costs
* Your property profits (after taking into account previous year losses)
* Your total income minus savings income, dividends and personal allowance
* If your finance costs are not the lowest, you can carry forward the difference to future tax years.
* It is a RELIEF but limited to a tax allowance at the rate of 20% instead of 40% for higher rate tax payers. However, your profit will appear higher at the income tax calculation stage, and could therefore push some landlords into the higher tax bracket. Therefore that portion of your income in the higher tax bracket would be subject to the 40% rate, before the 20% allowance! In simple terms you get 20% tax relief no matter your income level. Visit the HMRC website to see the rules and examples, or contact your accountant, to be sure of what the rules are.
* The way I am negating this is by paying a significant chunk of my monthly rental income, from my 4 buy-to-lets, into my SIPP. For every £1,000 I pay into my SIPP, the taxman adds £250 and my 20% tax band will be increased by £1,250. Providing I have done my calculations right based on my anticipated rental profit and income from my full-time employment, I will pay in enough per month to ensure my 20% tax band increases enough to ensure I won’t pay any tax at 40%.
* Another possible avenue is to declare your property letting / management activities as a business. I was told many years ago by HMRC that in some instances (?) this type of income could be deemed a business. I never pursued it because I had semi retired and split the income between myself and my wife so avoided the 40% tax bracket, and couldn’t be bothered with the hassle to save a few quid on tax allowances for capital expenses, office use, etc, particularly knowing we were soon to move overseas and use a letting agent for future management."

Hope that helps.

1 Like

Oversight:

  1. Your personal tax allowance is shared between your company employee income and your regular job income, so if the company pays you £10000 a year, your regular job personal tax allowance is reduced by that amount, to £2500, so you get taxed on your regular income anything above £2500.
  2. If you put your property into a SIPP as your company pension, then you may avoid capital gains tax on it. You will have to pay capital gains tax if it is not in a pension, but I don’t know what will happen if you decide to sell the property instead of converting it into a pension.
  3. Hence the need for an accountant to advise you. The accountant fee can be a tax educable expense against your property income even if you do not go down the company route.

In my case, I would prefer to pay the HMRC rather than put up with the hassle and deadlines involved in running my own company. And HMRC needs the money to help run the country, so be charitable to the rest of us (joke).

So, some food for thought. Good luck in coming to a decision, and if you do decide to go the company route, please do let us know why, and the costs and benefits involved.

1 Like

Hi why have you left this so late
you should not have been paying 40% on your property unless your income from the property is more than £100k plus even then you should have talk to a good accountant to bring you tax down.
Hope you do not mind whta i am saying as i like to talk straight no bs.
You will only pay 20% tax when you put into a ltd company so will save there
But if you want to sell your properties then not good idea to put into ltd company.
its along topic.
iF you plan to keep the property and pass on yo you kids then ood to put into ltd co
The only is issue is when you put it into ltd co you will have to pay stamp duty on the to ltd co.
Thats just a few things for you to think about
let me knwo if you want to know more have a great life

1 Like

One thing to be aware of is that you will need to “sell” your property to your company in order for the company to own it. That will incur stamp duty. That may well offset any benefit you get for a while at least. You will also need to submit annual accounts for the company and various other company related admin. Not a big deal, but an extra expense if you get an accountant to do it.

1 Like

Thank you!!! I do have an account done more information about me I have 5 properties on average I pay around 6 and 8k a year on tax after expenses deducted. For the past 10 years the tax bill has slowly increased due to more and more government rules. What my account does is add my daytime salary to the profits from the houses. It was the accountant that suggested the ltd company. This is all new to me so just investigating.

John45, thanks for explanation. Of course, there are hundreds of websites in the Internet, which explain a lot of things about rent payments and how should landlords react in different situations, but this resource I found few weeks ago ( https://www.landlordzone.co.uk/ ), I think one of the best in UK, cause it can explain everything in property business by showing up real cases.