Property Empire (final part!)

This week, I'll go through liquidation or share sales.

A couple of definitions first.

a/ If you sell the company to someone else, you are selling the shares in the company.

b/ If you liquidate the company, the share cease to exist and you become the owner of the company's assets.

In either case you will realise a capital gain. The difference between the cost of your shares and the price you get for them. Or the value of the company's assets in the case of liquidation.

Capital Gains are taxed as if they were income, but there are some relief's that will reduce the taxable amount.

The most obvious one is the 'annual exempt amount', currently £9,600, which increases each year.

A lesser known one is ;entrepreneurs' relief that depends on how long you owned the shares and whether the company was a 'trading' company or not.

In the case of a trading company, the capital gain is reduced by four-ninths if you have owned the shares for one year and there is a lifetime maximum of £1M of gains to which this relief applies. The definition of a 'trading company' is strict and unfortunately a property investment company is not a 'trading company'. However, property development companies (which buy or build properties for resale), or property management companies (which don't own properties but deal with rent collection, finding tenants, repairs etc.) can be trading companies, so there are some tax planning possibilities there.

SO SHOULD I USE A COMPANY OR NOT?

Here are two general guidelines.

a/ If you don't expect to be paying income tax at the higher rate, there is no real advantage in using a company. Corporation tax is scheduled to rise to 22% by 2009, whereas income tax is to be reduced to 20% this year.

b/ If you expect to be a higher rate tax payer and you intend to reinvest some of your profits to grow your business rather than taking them all for personal use, you may well be better off by using a company. The 21% rate of corporation tax is a real advantage if the profits are to be retained in the company rather than taken out using one of the methods described earlier.

I hope this series of short articles has helped. As usual, I can answer questions by email at helpdesk@taxrefundmoney.co.uk or through this blog.