When we are in any kind of a business we are looking for ways to save taxes.Tax is a cost which cannot be avoided but there are ways to reduce the taxes we pay. For example, by choosing the right structure of our business we might be able to save taxes. There is no correct answer as to what the structure should be; it depends on your individual circumstances.
In recent years there is an increased trend in incorporating the property business, by property business we mean buying the property to rent for business purposes. Why is incorporating becoming a popular choice of business structure. We have listed 5 reasons why you should incorporate your business:
If you are in a property business there are 5 reasons why you should run it as a limited company
1. The Tax Rates
The corporation tax rate for the company profits is 19% and this is less than the tax you pay on your personal income which is 20%, 40% and 25% depending on which tax band your income falls into
However, there is no tax allowance available to the company profits which means that you have to pay taxes on all the profits that you make. Whereas, although the tax rates are high on the personal income there is a tax allowance available and you won't have to pay any taxes when you earn upto £12, 570.
This means that if you deduct all the expenses from your income and you are left with the profit of £12, 570 it would be worthwhile running the property business as self employed provided you don't have any other income which uses your personal allowance. If you have your personal allowance already used up for example if you are doing a job or you have invested somewhere else as well you might want to incorporate your business to save taxes by paying tax at 19%
2. The Finance Cost
The finance cost is the cost incurred which you pay when you borrow money to buy the property. In this case it will be the interest and other costs which you pay on the mortgage.
You can deduct these costs when you are running the business as a corporation but these are not allowable expenses when you are self -employed.
When these costs are deducted they will reduce your taxable profits and therefore the taxes that you will pay to HMRC.
3. Low rates of capital gains tax
You pay capital gains tax when you are self-employed and you sell your assets such as your property. When you sell the property which is a residential property and it's not your main home you will pay CGT at 18% or 28% depending on which tax band you fall into. If you are a limited company you will pay corporation tax(19%) on selling the property.
4. Maintaining your income
If you have income from other sources as well you might want to restrict your income to save upon some personal taxes. If your property business is incorporated it is a separate entity and you can limit the income which you take from the company. You can take the income in the form of salary, dividend income and you can even take out the dividend loan.
If you are thinking of starting a business or you a landlord and you want to incorporate your business do not hesitate to contact Taxaccolega, accountants in Croydon at 020 8127 0728 or message us here and we will be happy to help you.