Never a Lender or a Borrower be...........

...but it depends on the circumstances. This week we'll go through the benefits (or not) of lending and borrowing from a Property company.


Loans

This can be a complex subject, but I'll give a brief outline here but would advise discussing the subject in some detail with your accountant or advisor.
First, it is wise to lend the company the money it needs to get started, rather than putting it in by subscribing to shares, because the company can repay that loan in the future with no income tax charge on the lender.
It is also unwise to borrow money from the company, because the company itself has to pay a form of 'deposit' of 25% of the amount loaned to the taxman that is repayable when the loan is repaid.
If the company lends more than £5000.00 to you, you will be charged to income tax on the difference between the interest on the loan you pay to the company and the 'official rate' (currently 6.25%). So, if you have an interest free loan of say, £5001.00 for a year, you will pay income tax on £312.50, meaning £125.00 for a higher rate tax payer.
That may sound like a good deal, but be aware of COMPANY LAW. More sophisticated planning involves the company lending money and then writing off the loan. BUT this is an area where you must take specialist advice to avoid getting into serious trouble with both the tax man and COMPANY LAW.

Next time we'll cover the subject of 'liquidation of shares', but if you want the whole series of articles (including next weeks), please email helpdesk@taxrefundmoney.co.uk with subject matter "taxfacts 7" and we'll send it.

My Property Empire (continued)

This week we'll have a look at a subject that has gone through some fundamental changes;

Benefits in kind.

This used to be a good way of extracting value from the company, because no National Insurance contributions were due on benefits that were not in the form of cash, but the company could still deduct the cost from its profits. Now the rules are much tighter and generally the company will have to pay NIC on the value of any BIK it provides, so no there is no real point serious 'BIK' planning. However, there are still some benefits that are tax free and worth considering.

a/ Childcare up to £55.00 per week subject to various conditions

b/ Car parking at the workplace

c/ Mobile phones, but now only per employee

d/ Staff parties up to £150.00 per head per annum.

If you'd like to read the remaining parts of this article, please email helpdesk@taxrefundmoney and we'll send you the rest by email, fax or post.

Property Empire (Part 2)

Continuing from last week I touched on the various ways of getting the best out of a company (if you decide to go down that route). This week we'll get on to part two which is

2. Dividends

If a company 'distributes' its profits by paying dividends, it cannot get a deduction from its taxable profits for doing so; so the sums are different. Because dividends are paid out of profits already charged to corporation tax, they come with a 'tax credit' that can be offset against any income tax due from the shareholders who receive the dividend. The sums can be complicated, but here goes;
If the company pays a dividend in cash (say £900.00), you have to add one ninth (£100.00) to it to arrive at the taxable amount, so in this case you are treated as receiving £1,000.00 of taxable income, which includes a 'tax credit' of £100.00. If you don't pay tax at the higher rate, the tax credit is enough to cover the income tax due, so you don't need to pay any further tax.
If you are a higher rate taxpayer, you will pay income tax at the 'dividend rate' of 32.5% on your dividend of £1000.00, giving a tax bill of £325.00. From this you can deduct the tax credit of £100.00, so you have to pay a further £225.00 in income tax.
It's much simpler to look at it like this; a higher rate tax payer will pay income tax of £225.00 on a dividend of £900.00....that's 25%

If you can't wait to read parts 3 to the end, please email me at helpdesk@taxrefundmoney.co.uk with subject matter "TAXFACTS 7" or call 0800 298 9358 and we'll send you the complete article either by email, on a fax number or by post.

Should I form a company for my property empire?

Should I form a company to build my empire?

This is a question that I am frequently asked and unfortunately there is no simple answer because so much depends on your plans for the future and your current circumstances. However, I will try and give some guidelines. This will give you a starting point to discuss with your accountant or financial advisor.

Lets start with the basics.

A company pays Corporation Tax (CT) at 21% on profits up to £300,000. Above that there is a sliding scale but the maximum tax on its profits is 28%. This sounds good when compared to income tax at 20% on income up to £36,000 per annum and 40% above that. But the problem is the money is in the COMPANY and there will be further tax to pay when it is taken out for the shareholders use.

The term "Corporate Veil" is a term used by the courts to describe the relationship between a company and its shareholders. The point is that a company is a separate entity from its shareholders and its employees. It pays its own tax on profits and gains. It can be sued for its debts and is the legal owner of the money it makes. If the shareholders want to take money out of the company, getting it through the aforementioned 'corporate veil, will usually create a tax charge.
There are broadly speaking, five ways to extract cash from your company.

1. Wages, salaries and bonuses.

2. Dividends

3. Benefits in kind

4. Loans

5. Liquidation or share sales.

As this is a subject that can run over many pages, I will deal with a separate one each week, starting with Wages,salaries and bonuses.

As a rule-of-thumb, this is the most expensive way, because both you and the company will have National Insurance contributions to pay. For 2008/09 yours will be 11% up to a salary of £40,040 and 1% thereafter. The company will pay the employers contribution of 12.8% with no upper limit.. If the company is your only source of employment, no National Insurance contribution is due on wages of less than £105 per week.

In these circumstances, it makes sense to pay yourself and any shareholders, including family members who genuinely work for the company, this much per week. Because the company can claim the cost of your salary as an expense against its profits chargeable to corporation tax, there will be a saving of £1,146.6 (£105 x 52 weeks =£5,460 reduction in company profit (taxed at 21%) saves £1.146.6) as a result of paying a salary just equal to the NIC threshold. The income tax payable is neither here nor there, because if you were trading as an individual, you would have to pay that.

Next week, I will cover dividends.

If you can't wait for the next four exciting instalments, you can request the whole subject, just by emailing helpdesk@taxrefundmoney.co.uk and putting "Company Business" in the subject matter and I will arrange for a copy of the whole article to wing its way to you.

Have a Holiday courtesy of the tax man part 2

Last week, we discussed some ideas about paying less tax by using a partner. So this week, I thought I'd continue the theme and make a few relevant points.

What if your partner does generate some income too? It doesn't matter, as long as they pay in a LOWER tax band, then their are still savings to be made.

If you think you can exploit this information, but have already bought in your (sole) name, then you still do something about it. It will cost about £300-£400 pounds to have the property transferred into multiple ownership. What prevents people from doing it are;

a/ they don't know it's possible and

b/ they think it's a long and complicated process.

Here are the two simple steps you need to follow;

a/ Contact your mortgage lender and tell them why you want to transfer. you will get new mortgage forms to complete. Normally, it will be transferred on the same terms as the original mortgage, but if your interest rate has gone down, then be cheeky and ask if you can continue with the new rate.

b/ Contact your solicitor when your mortgage has been approved and they can have all the relevant documents changed into joint/multiple names very quickly.

Lastly, a partnership will benefit you when it comes to selling a property.

Each owner will be able to use their own personal CGT allowance. This means that if a husband and wife own a property jointly, then they can reduce any CGT liability by a minimum of £19,200 as the current CGT allowance for 2008/2009 is £9,600 (£9,600 x 2)

Again, I can't take any phone calls on this subject, but if you have any CGT related matters, please email helpdesk@taxrefundmoney.co.uk. Also, we have a 'CGT Winners & Losers' chart. If you'd like a copy, contact the same email address with subject matter CGT CHART.

Have a annual holiday courtesy of the tax man !

Have an annual holiday courtesy of the tax man !

A simple and effective property tax strategy is to buy a property in multiple ownership in the form of a partnership.

Partnerships are very simple and effective.

But two crucial elements are that;

1. Your partner must not be in the higher tax bracket (currently 40%)

2. They must be completely trustworthy !

This is so important that it is worth repeating. THE PARTNER MUST BE TRUSTWORTHY.

If you buy in a partnership then the person must be someone you trust implicitly. i.e your spouse, mother, father, brother, sister, etc. This is not for any tax reasons, but simply good sound business practise.

As a rule, if you are a higher rate tax payer (currently 40%) then ALWAYS try to purchase with someone who isn't. And ideally with someone who pays no tax at all.

Partnership split.

Property jointly owned by husband and wife is defaulted as a 50:50 split by the Inland revenue.

However, this is not the case between non-husband and wife. Because the property ownership is based on fact. If 'Jack' has funded 20% of the deposit & Bill has funded 80% of the deposit, the property would be split as 80:20 in Bills favour.

You need to understand exactly how to inform the Inland Revenue about this arrangement. Make an appointment with your accountant to discuss these issues or email me at helpdesk@taxrefundmoney.co.uk, if you are already in this position (or are thinking about it).

Better still if you have a non-income-paying partner.

In the 2008-2009 tax year, if your partner does not work, then the first £5,435 that your partner earns through property income will be exempt. In addition, the next 36,000 of income will only be taxed at 20%. Any income above that will be taxed at 40%. The upshot of that is if you pay tax at 40%, but have a 50:50 split with a non-working partner, then on the basis of an equal profit of say £5,000 from property income, you will pay £2,000 less in tax on a yearly basis. Simply by having the property jointly owned.

Don't forget, tax bands may change, so your earnings could be greater than this.

To be continued...........

Wills & Trusts

What makes you laugh?

I love 'one-liners' My favourite is from an American Civil War film. One side is charging the other through a cloud of gun smoke and an officer turns to his men and orders "Fire at will". One of his men shouts back "Which ones's will?"

Speaking of wills, I was talking to my friend Ron Bateman of Sterling Wills, who gave me this interesting snippet of information;

"Most couples own their house as joint tenants, ie. If one dies the other automatically becomes the sole owner. If the survivor then has to go into a care home, he or she is means tested. The house is sold (because no-one’s living in it) and the proceeds of sale are taken to pay the fees. With average fees of £650 p.w there may be nothing left for the children to inherit.

If however, they change ownership to ‘tenancy in common’ they then own 50% each, which means in their wills, they can leave half the house into a trust for the ultimate benefit of the children, giving the surviving partner a ‘life interest’ in the half of the house he/she does not own. If the house sells for £300k, £150k is ‘ring-fenced’ in the trust and cannot be claimed by the authorities. It’s all perfectly legal and every couple in the country who own their own property should do it."

Their website at www.sterlingwills.co.uk gives a case study demonstrating this.

Four Ways you could try to reduce.....

......your Inheritance Tax liability.

What is inheritance tax (IHT)?

Inheritance tax is commonly referred to as both a 'gift tax' and also as a 'death tax.'

If, during your lifetime, you 'gift' part or the whole of your estate, then the inheritor will be liable to pay inheritance tax.

Similarly, if, at the time of your death, you pass on part or the whole of your estate, then again, the inheritor will be liable to pay inheritance tax.

Is there an IHT allowance?

YES - but it is not really that favourable, given the property price increases over the past few years.

For the 2008-2009 tax year, the IHT threshold level is £312,000. Anything above this amount is taxed at 40%, i.e., at the highest rate. This means that if, at the time of death, your whole estate is valued at less than £312,000, then the inheritor will have no tax to pay. But, if it is over this amount, then anything above the £312,000 threshold level will be taxed at 40%.

Now, given the dramatic property price increases over the past few years, this threshold level seems to be VERY LOW. If parents living in London and the South East, in particular, were to pass away today, then it is highly likely that they would trigger an immediate tax liability on their loved ones. This is because a very large number of properties in these areas are already valued at above the threshold level! The average property price in the UK in 2020 is predicted to be in excess of £330,000.

One VERY important point to note!

If YOU die tomorrow and leave the estate to your children, then any IHT liability is due immediately by them

FOUR ways to reduce inheritance tax

Here are four common ways of reducing inheritance tax.

a) Utilising the £312,000 threshold level.

If circumstances are such that your estate is not worth more than the current threshold level, then as mentioned earlier, there is no tax liability for the inheritor. However, as we have seen earlier in this strategy, this scenario is becoming more and more unlikely!

b) Gifting to a spouse.

All gifts between husband and wife are exempt from tax, as long as they both live in the UK. This means that even if a husband has an estate valued at £10 million pounds, then he can gift this to his wife.
It does not matter if it was gifted during his lifetime or at the time of his death; his wife will incur no tax liability.

c) Gifting as soon as possible during your lifetime.
During your lifetime it can be tax-beneficial to gift sooner rather than later, especially if you know who your estate is going to go to. There are two significant benefits of gifting during your lifetime.

(i) The longer you live, the less tax your inheritors will have to pay.

This is because there is a scaling taper relief that is available, which reduces the amount of tax that is liable.
So, if you transfer a property or gift it away and survive for seven years, then the inheritor will have ZERO IHT liability.
(ii) You can use the IHT allowance again. If, after gifting, you survive for more than seven years, then you can use the IHT allowance AGAIN!

This means that if you gift properties to the value of £156,000 each to your son and daughter and survive for seven years, then you can use the IHT allowance to gift up to £312,000 again!

d) TRUSTS You have already learned that husband and wife incur no IHT liability when gifting to each other. However, if you want to gift to your children, then setting up a trust may be the best option.

Trusts can be used to hold properties as well as other appreciating assets such as stocks and shares. Properties can be placed into trusts in a tax-efficient manner, which can help to significantly reduce and even avoid capital gains or inheritance tax.

There are a number of different types of trusts that can be set up to make tax savings.

Each has its own merits and is suitable for different scenarios.

I strongly recommend that if you are considering transferring to your children or other members of your family, then you take tax advice from a TRUST expert.

DON'T forget YOUR capital gains liability!

Remember, if you decide to gift/transfer a property, then YOU are still liable to pay capital gains tax on any profit that YOU have made. If you transfer/gift a property, it does not eliminate YOUR OWN tax liability.

DON'T forget this important point! Timing of the transfer is CRUCIAL.

RECORDS FOR THE TAX MAN

Record keeping for the tax man.

What's a record. Well, it's a big black thing with a hole in the middle.

What?, sorry !, wrong kind of record. I wondered why I had to keep his, when I've got enough to do.

Any way, back to the subject.

Unless I'm mistaken you are investing in property to make a profit and as a consequence if you are successful you'll make more than if you put your money in a bank or building society.

The downside of making a profit is that you'll have to pay taxes on the extra income. The one that galls most people is the payment of Capital Gains Tax. Briefly, is where you pay tax on the profit you make when selling a property other than your main residence.

To ensure you keep your 'gains' to the minimum, you can off-set some expenditure against your 'profits'. There are a number of allowances and we will go into these at length in the future, but it all starts with record keeping. Even though you may have an excellent accountant, he has to have something to work with, so it's important you start keeping records of all transactions from day one. This will not only help him get your accounts correct, it will also save you money. Because if your accountant also has to get together all stubs, receipts and contracts for you, he is going to add that to your bill.

So, what kind of records?

i/ Contracts for the purchase or sale, lease or exchange of the property.

ii/ Any documentation that describes properties you acquired but did not buy yourself, for example a gift or inheritance.

iii/ Details of any property that you have given away or put into trust

iv/ Copies of any valuations taken into account in your calculations of gains or losses,

v/ Bills, invoices or other evidence of payment records such as bank statements and cheque stubs for costs you claim for the purchase, improvement or sale of the property.

vi/ Correspondence with buyers and sellers leading up to the sale of the property.

I know all this seems pretty obvious, but I'm always surprised at what people don't keep when I'm asked for advice. My advice is; keep everything, even if it means paying someone a small storage charge if you don't have the space. Your accountant should be able to help out with that aspect.

If you need advice on any subject connected with CGT , sorry, I can't take calls, but will be happy to help via email on helpdesk@taxrefund money.co.uk or through the forum.