In one of George Osborne’s last budgets he announced that the first £1,000 of rental income received can be tax free.
Rather than identifying costs offsetting to the rental income an allowance of £1,000 can be claimed instead.
If properties are jointly owned this is £1,000 per person.
Unfortunately there are a number of rules which make the usage difficult, one of which is rental income from a “close” company or a company the owners of the property “are employees of or participants in”. This means it cannot be used for Home Use relating to small limited companies or LLP’s.
Despite this the use of a Home Use Rental or License can still be tax effective. For the following two reasons:
1) Part of the “property income” generated can be offset by prorating property costs as Gas, Electricity, Insurance, Rent, Water, Council Tax (the latter of these often being questions by HMRC in typical home use calculations but not, so far, in property cost calculations). This makes part of the income tax free.
2) Tax on the excess after 1) above can be a more cost effective approach. As shown in the example below.
Assuming that all the Dividend Allowance taxed at 0% and the Salary up to the NI threshold has been used and you have a £1,000 you wish to take from the business.
For simplicity the numbers below also assume you are in the 20% income tax bracket and so employees NI is paid at 12.8% . We will also assume a best case that the employee allowance offsets employers NI. The calculation can be done for other tax brackets.
Method 1 ….. Salary
Tax would be 20% Income tax and 12% hence Tax/NI paid £320 and net £680.
(with employers NI an extra 13.8% tax could be paid)
Method 2 ……. Dividend
Dividend is taken after Corporation Tax …. For 2018 19 this is 19%. Therefore from £1,000 Corporation Tax would be £190 and £810 left. This would incur 7.5% Dividend Tax (£60.75) leaving £749.25 Net.
Method 3 ……. Home Rental (above prorated costs)
As this is an allowable expense for Corporation Tax purposes the £1,000 income incurs the marginal rate of tax for the person which in this example is 20% so £200 making leaving £800 Net.
Therefore after paying a salary to just above the employee threshold levels the results for tax for an extra £1,000 are …
1) Rental Income £200;
2) Dividend £250.75;
3) Salary £320.
(Remember these are after taking the tax free, 0% allowances)
If the property is jointly owned then the property income should be jointly shared.
If one of the property owners marginal tax rate is above the 20% threshold then the results will change.
A “fair” rent should be charged.
As HMRC advise “Dividends should not be used in lieu of Salary”
Consider Capital gains implications on setting up Rental/License Agreements.