A higher rate taxpayer landlord taxed at 40% (or 45% if an ‘additional rate’ taxpayer) may be able to achieve some benefit from the 19% lower small profits rate of corporation tax by incorporating a company that collects the rental income on behalf of the landlord. Under this arrangement, ownership of the properties is still retained by the individual and a set amount is deducted from the rental income received into the company's bank account as a management charge. The balance of income is paid to the landlord as rental income.
There will be few claimable expenses by the company as expenses that are allowable will relate to the actual running of the management company (e.g., stationery, phone bill, salary). Corporation tax will be payable on any profit and any withdrawals will be taxed as dividends in the hands of the shareholder, preferably of amounts that allow the dividend not to be subject to the higher rates of personal dividend tax.
The management/service charge is a fully allowable expense against the rental income received in the hands of the landlord.
It has been suggested that a landlord can only benefit from this form of tax planning if they own at least four or five properties as the additional compliance costs for a company are higher than those for a sole trader/property investor. However, the point should be made that the higher the number of properties, the higher the management charge and consequently the higher the tax relief for a personal investor taxed at higher rates.
There will be a ‘one-off’ legal fee on the setting up of the management company and increased administration thereafter; therefore, a proper agreement between the company and the owner is advised. Legal fees are tax deductible against the management service charge.
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