Sole trader or Ltd Company?

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  • Sole trader or Ltd Company?

    Hi everyone

    I know this has been a thread recently, and I'm sorry to be going back to it, but I could really do with some help here.

    I've recently retired, and am a higher rate tax payer. I plan to buy some properties on a buy to let basis. Everyone I've spoken to has given me a differnet opinion of whether its better to be a sole trader or a ltd company. Given that I want to minimise my tax burden overall, and am already paying tax at the highest rate - which method would be best for me?

    Has anyone any ideas?

    Thank you in advance


  • #2
    Last time we totted them up there were over 10 forms of tax a landlord can end up paying: Are you sure just looking at income tax is wise??? (eg CGT, IHT....).

    To answer your question anyway we'd need to know the chancellor's tax regime for individuals & companies between now & when you drop-dead/sell the last property: Kinda hard that one....
    I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...


    • #3

      I was just thinking of income tax and CGT at the moment. Not thinking of popping my clogs just yet....!



      • #4
        The reason you get multiple answers is because there are multiple scenarios.

        How do you plan on funding the purchase of the properties? Buy outright with own money, large deposit, small deposit, btl mortgage????


        • #5
          All outright without a mortgage in the beginning. If things go well (??!) then I might borrow to buy more proprties and leverage up.



          • #6
            As another poster has said, the reason you get multiple and differing answers, is that there are multiple and different scenarios to consider.
            Although you are just thinking of CGT and IT, there are other taxes to consider, notably stamp taxes as well as inheritance tax. You may not be thinking of "popping your clogs yet", but most property investment is long term and death and IHT must be considered with CGT and IT.
            Although you say you are a higher rate taxpayer, this still is not enough to give a definite yes or no, because you have not said to what extent you will be extracting the income from your company.
            Companies pay tax at 20% whilst you are paying tax at 40%. So, in general, if the income stays within the company, you will pay less tax. However, when you start extracting the income, there is little or no advantage to holding a property in a company.
            Companies do not pay CGT, so do not get an annual exemption. So if there was capital gains in the company, the company would pay corporation tax on its gains. A company's gains are subject to indexation allowance, whereas an individual is not entitled to indexation allowance.
            So agian, it is not possible to say with any accuracy whether a company or holding the property personally is advantageous. Again, much depends on how much of the gain is extracted from the company and how long you intend to hold the properties and what sort of gains are expected.
            Given that it is not possible, with any degree of accuracy to determine what sort of gain you have, then often the answer to your question is often determined after the properties have been sold.
            You really need to sit down with a professional advisor and explain your current circumstances and future plans.


            • #7
              Would OP be best to set up a Ltd company, keeping the properties outside of it, but perhaps the company can charge for renovation works etc and upon the OP selling the property, the Ltd company invoices for works done, leaving the OP his CGT allowance and the rest of the profit goes into the company? 20% corporation tax and then 10% for dividends.

              OP would have his annual allowance of CGT and the rest of the profit would be taxed at 30% instead of 40+


              • #8
                Originally posted by Claymore View Post
                Would OP be best to set up a Ltd company, keeping the properties outside of it, but perhaps the company can charge for renovation works etc and upon the OP selling the property, the Ltd company invoices for works done, leaving the OP his CGT allowance and the rest of the profit goes into the company? 20% corporation tax and then 10% for dividends.

                OP would have his annual allowance of CGT and the rest of the profit would be taxed at 30% instead of 40+

                Yes it is possible to do as you suggested, but it may not always be beneficial.
                A company pays tax at 20% (on profits below £300,000) on indexed capital gains.
                An individual’s capital gains tax may be as high as 28% but as little as 18%.
                Although an individual gets an annual exemption, it does not get indexation like a company.
                So you have to weigh the loss of exemption and capital gains tax at 18% or 28% with indexation and tax at 20%.
                You are also getting a bit mixed up with your tax rates.
                When a company distributes its profit to its shareholders, the profit has already suffered corporation tax, and so the dividend is deemed to have already had 10% tax paid on it. It is not an additional tax.
                The dividend is treated as the top slice of a person’s income, and is taxed at 10% if he is a basic rate taxpayer and at 32.5% if he is a higher rate tax payer.
                So, if an individual has property profits of £1,125.
                If he is a lower rate taxpayer, his tax will be £225. (20% of £1,125)
                If he is a higher rate taxpayer his tax will be £450. (40% of £1,125)
                Compare this with the situation if he had the property in a limited company.
                The company would pay corporation tax at 20% ie £225. If the company then distributed the profit to the individual it would pay £900. (£1,125 less £225)
                If the individual was a lower rate taxpayer there would be no further tax to pay. His gross income is deemed to be £1,000 and tax is deemed to have been paid of £100.
                This is the same overall tax paid as if the property was held individually.
                If the individual is a higher rate taxpayer, his tax calculation would be
                Gross dividend £1,000
                Tax at 32.5% £325
                Less tax deemed to have been paid (£100)
                Total tax due £225.
                The overall tax burden would therefor be
                Corporation tax paid by the company £225
                Plus corporation tax paid by the individual £225
                Total £450.
                Again, the overall tax burden is the same.

                If the profits were left in the company instead of distributing them to the shareholder, then there is a clear advantage with a company if the profits are to be reinvested in further properties.


                • #9
                  remember If you use a mortgage to buy property, you can offset mortgage interest payments against your annual tax. If you buy outright in cash, and dont remortgage then you have nothing to offset against other than repairs, legal and lettings fees etc.


                  • #10
                    Thanks Thompson - that's given me a good bit of insight.

                    I've had to read and absorb all of the above a chunk at a time. Can you confirm my understanding:

                    If a basic tax payer grosses something like £20K; then his company can pay him say £5000 as a dividend, the basic tax payer would not have to make a further payment of tax, because the combined sums is less than the higher rate, and also, the company had already paid corporation tax of 20% on its net profits?

                    Many thanks.


                    • #11
                      Yes, you are right. If the taxpayer already has salary/other income of £20k he will pay no more on the dividend of £5k.
                      And, yes, the company has already paid tax on 20% of its profits. So to get £5k in dividends, the company would have had to have profits of £6,250.
                      So the individual is in the same position whether he hold the property individually or the company holds the property.


                      • #12
                        Many thanks.


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