Loans Between Limited Companies For Property Investment
Have you got a company for the core business activities?
Are you currently being taxed heavily around the money that you simply withdraw from the organization and purchase property?
The issue – tax on money you take out of the company
The issue I see with lots of real estate investors who own limited companies is they don’t look at the quantity of tax they pay if you take wages or dividends from the organization. If you’re a greater rate citizen then you’ll pay yet another 22.5% tax around the money you remove from the organization as dividends.
I’ve labored having a couple of clients who designed a loss on the switch after they required tax into consideration. Why would you devote hard work simply to pay HMRC?
You may decide to claim entrepreneurs’ relief in your buying and selling business activities and for that reason don’t want to jeopardise this by purchasing residential qualities that you’re planning to help keep lengthy-term and book. As a result you might have two limited companies:
One for trade business activities
One for investment activities
Scenario 1: Current structure
Let us say you have to pay yourself £100K from the limited company. For simplicity let us imagine that you’re using £50K of the money for any property investment the following:
-£11,250 tax on dividends at 22.5%
£38,750 internet cash to take a position
After this you purchase a property while using above money which makes £500 monthly profit:
£6,000 annual profit
£2,400 tax at 40% around the above amount
£3,600 internet cash
As you can tell in the above scenario you will pay £13,650 in tax. This doesn’t even look at the proven fact that mortgage interest relief will quickly be limited to 20%. This problem is explored further within our budget announcement blog.
Scenario 2: Recommended limited company structure
Rather of purchasing qualities in your name you can purchase qualities inside a new limited company, one that’s outside of your buying and selling activities. You, as a person, setup the organization having a £1 share, or £2 if you’re setting the organization track of your lover. By doing this you can engage in the entrepreneurs’ relief if the organization is shut lower.
Company A (your buying and selling company) loans Company B (neglect the company) £50,000. No tax is payable about this loan.
Now let us visit again the figures.
£6,000 annual profit in Company B
£1,500 interest compensated to Company A
£665 tax according to 19% corporation tax (by 2017)
You can observe in the above that you’ll pay just £665 tax in scenario 2 over a tax liability in scenario 1 of £13,650.
Interest in one company to a different: commercial arrangement
As Company A is loaning Company B money and they’re both separate legal entities then your loan interest must be at commercial rates. Therefore it must be circa 3% over the Bank of England rate of interest, which at this time means a 3.5% loan interest charge.
• 3.5% interest per year in one limited company
• The eye earnings is going to be taxed in Company A
• The eye billed towards the second company is a tax deductible expense for Company B
Being an aside, I’d caution against charging a restricted company a pursuit charge should you personally loan it money as you would be having to pay tax around the interest.