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I met a landlord recently who uses a ltd. co. (that he owns) to manage his own properties (I am assuming personally owned).
I was wondering what the advantages of this are? (in particular re. taxation)
Clearly the ltd. co. could charge say 20% of the rent for management (based on Foxton's charges) and this could be claimed as an expense against income tax.
The limited company would have costs and part of this fee would end up as profit on which corporation tax (CT) is payable (20% currently dropping to 17%). After tax, £5k can be drawn tax-free as dividends (assuming no other dividend income) and so would be attractive to a higher rate tax payer. Above that £5k sum taxation of salary or dividends makes the overall proposition unattractive (due to sum of CT and income tax).
Or am I missing something? Do any PT members haev experience of this arrangement please?
Such an arrangement has some benefits if the only properties being managed are owned by the owner(s) of the company (along the lines you outline, but with the costs & liabilities of running the company)
If properties owned by others are serviced by the company, it becomes a much better proposition
The reason for doing it probably depend upon the individual circumstances of the person you met, but it's likely that they were on the edge of becoming a higher rate tax payer and the Ltd allows them to put profits into the Ltd @ 20% instead of 40% & 45%. Tax is payable on the way out of the vehicle, but there is considerable flexibility about where it is paid (e.g. children could be shareholders).
I don't know how the changes to the rules affect HMRC's view of this now that Avoidance is treated the same as Evasion.
Goodguy I manage a portfolio owned by my mother, about five years ago I talked her into initiating a limited company to place the properties into. My reasoning was purely that she was in the higest income tax bracket, therefore by moving to a Ltd Co the portfolio earnings could in effect be ring fenced but the lower corporation tax.
That was the main advantage of the move back then, but what I will say is the transfer involved the company "buying" the properties from her, therefore in some cases leading to capital gains charges. As a result, a property in London has been left in her name purely because it has risen by far to much in the last 8 years, therefore the capital gains payment makes the move pointless.
Another downside was that we were told fewer lenders were willing to finance a Ltd Co, however since joining this site I've found that to be a little inaccurate. Although, I have just read a post that suggests the government are pressuring lenders to make lending to Ltd Cos more difficult which is not great.
I set up a Company to avoid S24 but I also now use it for Management of my personally owned property
Its worked well so far so there is a silver lining to having a Company and I am finding more advantage's as time passes
Learn Change and Adapt ?????
even better if you live in country where you pay no tax dividends.
I believe Malta is one country is that right Arran
When you "the person" are non UK tax resident, dividends received from "UK Ltd Cos" are classed as "dis-regarded income", and so long as you waive your UK personal allowance there is no tax liability on these divdends to HMRC. You do however have a liability to the tax jurisdiction where you live.
I'm not familiar bringing investment income into Malta and the tax that maybe due on it.
That is not true.
Dividend income is taxable in Malta.
Only in certain set-up, I do not know about Malta tax system, I just googled,
The corporate tax rate in Malta is 35%, so shareholders will be subject to the same tax on the dividends they receive. However, the tax rate may be reduced due to Malta’s double taxation agreements, but also if certain types of legal entities are opted for. Among these, the participation exemption that applies to dividends received by a Maltese resident and domiciled company and which are considered part of its chargeable income. Dividends received from participating holdings, however, are not required to appear in their annual tax returns. This way, the dividends of the holding company will be deducted from the chargeable income by legal omission.
If a resident and domiciled company in Malta distributes dividends derived from a participation holding, the shareholders are allowed to file for a full tax refund with the Maltese Inland Revenue Department (IRD). In order to qualify for a participating holding a company must meet certain requirements. Also, in order to benefit from the full tax refund, companies must meet some demands, such as being registered in an EU country and the corporate tax paid by the company in the foreign country must be at least 15%.
Thanks for that Malta was mentioned because I know of a Landlord who has moved there
I have no intention of living on a small island myself DL
I guess, as opposed to being "non-domiciled" for personal tax (which is no extremely hard to achieve unless you truly do reside abroad), as a ltd company is a separate legal entity this does offer the possibility of using a company that is non-UK registered, but that is getting rather complicated! And I've not looked into the tax position.