A higher rate taxpayer who is the owner of more than one property can still benefit from the use of the lower rates of corporation tax in a situation where a company is created but the properties remain in the name of the taxpayer.
A set amount is paid as a management charge from the rental income received by the taxpayer to the company for the service role of managing the property business. The management/service charge is thus a fully allowable expense against the rental income received.
The management service charge income remains in the company until drawn down as dividends, preferably of amounts that allow the dividend not to be subject to the higher rates of personal tax. Corporation tax levied on the management charge received will be at 20% for 2016/17.
It is suggested that a taxpayer will benefit from this type of tax planning should they own at least four or five properties as the cost of preparation of company accounts is higher than for a sole trader/property investor's accounts. In addition, the higher the number of properties, the higher the management charge and the higher the tax relief thereon.
There will be legal fees on the setting up of the management company as a proper agreement between the company and the owner will be required but these fees will be tax deductible against the management income received.
This is a sample tip taken from our 112 page guide:101 Tax Tips For Landlords 2016/17