Simon Misiewicz

255: A-Z of buying property through a limited company, with tax guru Simon Misiewicz

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Simon Misiewicz

Tax guru and seasoned investor Simon Misiewicz is back on the podcast this week, with a comprehensive lowdown on limited companies. Not only do we cover the types, structures and setups of limited companies, but we also ask whether you need a limited company at all. His answer to that question might surprise you.

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Why are limited companies suddenly so popular?

‘We’ve seen a threefold increase in limited companies in the past year,’ says Simon. The introduction of Section 24 is one of the reasons for this increase. ‘If you’re going to be having properties in your own name, Section 24 means you’re going to be paying more tax.’ People involved in joint ventures are also driving the increase. And in both cases, people are rushing into setting up limited companies without seeking professional advice. ‘It’s creating a total tax nightmare,’ says Simon.

Is a limited company the best option for a joint venture setup?

Not always. Especially if the relationship with a partner could sour in the future. Rather than setting up a limited company with joint venture partners, he suggests getting them on board with your own limited company in order to build up trust. ‘They create a loan into your company and you agree in exchange for that loan that you will do a profit share of a property that is owned by your company,’ he says.

When is setting up a limited company worth it?

Every client who walks through Simon’s door gets a crib sheet to work through which helps them determine whether a limited company is worth it. The sheets begins by asking them what their long-term plans are.

‘If you’re a property investor who loves your job, [if] you’re a higher rate taxpayer and what you’re doing is you’re building up these funds in a limited company and you don’t plan to take too much money out of [it]; you’re happy to sit on it for 10-15 years. Then a limited company is absolutely the right thing to do,’ says Simon.

19% rate of corporation tax today

17% rate of corporation tax in 2020

‘But if you’re planning on setting up a limited company and taking all the money out of that limited company… that’s disaster 101,’ he adds. ‘[You’re] going to be paying 19% corporation tax and if [you’re] not careful [you] could also be paying 32.5% dividend tax as a higher rate taxpayer. Add those two figures together and it’s probably more tax than [you’d] be paying if it was in [your] own name.’

When is it better to use a limited company?

‘Once you get to £50,000 and beyond, stop buying properties in your own name and maybe start buying additional properties in a limited company,’ says Simon.

For those just starting out or with profits of less than £50,000, it probably makes more sense to keep things in your personal name. ‘If you have profits of £100,000 you will be paying £28,350 on average,’ Simon explains. ‘If you have a limited company and you extract that same £100,000, you will be paying income tax as well as personal tax. The combined [amount] is £36,000.’

The same person earning £100,000, but only needing to extract £50,000 of those earnings to live off in their personal name, will only have a tax charge of £20,511. ‘Buy-to-let mortgage rates are cheaper in your own name,’ explains Simon. As always, he advises talking to a tax advisor to work out when the threshold is breached for yourself and when Section 24 becomes an issue.

 Remember Companies House and HMRC  

‘Companies House is ultimately the organisation you’ll report to,’ says Simon. You need to both submit accounts to Companies House and pay your tax bill to HMRC, 9 months and 1 day after the year end at the latest.

Additionally, you must submit a confirmation statement to Companies House. This is due one year after the limited company has been incorporated. It lists the directors, shareholders and registered offices of the limited company. ‘That is where most people fall over,’ says Simon. ‘As a director, you’ve got to get your head around [it] quite quickly.’

What about SIC codes?

SIC codes, otherwise known as Standard industrial classification of economic activities codes, let Companies House know what your business does. ‘There are 3 SIC codes we typically use: one for letting of owned properties, one for trade and one for flip activities,’ explains Simon. Whilst it is possible to have multiple SIC codes for your company, Simon recommends sticking to one to avoid confusion.

What should you consider when setting up a limited company?

When setting up a limited company, Simon recommends thinking about who you want to have voting rights. This is especially important if you’re setting up the company with a spouse.

‘When it comes to shareholding, I would always say have different classifications of shares,’ adds Simon. He recommends asking your accountant for ABC shares. ‘If you have different classifications, such as A and B shares, you can distribute dividends how you like to those shareholders,’ explains Simon.

What’s the best way to withdraw money from a limited company?

For the this tax year, everyone has a personal allowance of £11,850. Simon explains that most people take this as a wage. ‘The problem with that is once you go over £8,424 you start paying employer’s National Insurance at 13.8%. As an employee, you also pay 12% National Insurance.’ To avoid this tax, Simon says he usually advises taking £8,424 maximum as a wage from the company and to take the rest of the money you want to extract as dividends. The first £2,000 of these dividends are tax free. You start paying tax on these dividends at a reasonable 7.5%, but once you’re earning over £46,000 or so you become a higher rate taxpayer and have to pay income tax of 32.5% on the dividends. Sometime to have nice things, you just have to pay more tax. 

Contact Simon

Optimiseaccountants.co.uk – to book an advice session for tailored property advice.

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