Buying a Bond instead of a Buy To Let

[AndrewLockhart]

Hi,

I have recently started contracting. My accountant suggested that I don't pay myself this year as I will be in the higher tax levels. Instead he suggested I leave the money in the company, and extract the money at another time when I can do so more tax efficiently.

This sounded all good advice, but then I figured out that my company would make a decent profit for which I would have to pay corporation tax on. A page I read on this website (IFA's guide to avoiding the new dividend tax :: Contractor UK) suggested setting up a wholly owned subsidiary of my company and buying a Buy-to-let by transferring profits from my main company to the subsidiary.

All makes sense, but I wonder if it has to be this complex? Couldn't I just buy a bond (or other investment) rather than a buy to let? The cashflows would be fairly similar to buying a house, taking rent then selling it. OR is it that the bond would be seen as mechanism to lower my tax while the Buy-to-Let would be a legitimate business move.

I intended to get a buy to let, next year but perhaps not before Apr 2017. However if it has the effect of lowering my overall tax I will obviously do it well before Apr 2017.

Regards

[Louisa@InTouch]

Purchasing a BTL or a bond would not reduce your corporation tax, as these would be assets for the company and therefore you'd still pay CT at 20% on your profits in the year.

However if you had a BTL, the income and expenses would then impact your CT for the year.

With a bond, you will find the value of this will remain as an asset, you will then be taxed on any interest/dividend income that you receive on this as and when.

If you are looking at a way to reduce CT, pensions is a great way. It's a business expense and in the long term, you will get these funds personally on retirement.

[northernladuk]

Start contracting, get a 6 month to a years warchest up and then start looking at what else to do IMO. The best investments arent going to help when you can't get your second gig and your money has dried up.

[VillageContractor]

Start contracting, get a 6 month to a years warchest up and then start looking at what else to do IMO. The best investments arent going to help when you can't get your second gig and your money has dried up.

This. make sure you have enough cash to survive (bills + living costs) in case something goes wrong.

[AndrewLockhart]

Purchasing a BTL or a bond would not reduce your corporation tax, as these would be assets for the company and therefore you'd still pay CT at 20% on your profits in the year.

However if you had a BTL, the income and expenses would then impact your CT for the year.

With a bond, you will find the value of this will remain as an asset, you will then be taxed on any interest/dividend income that you receive on this as and when.

If you are looking at a way to reduce CT, pensions is a great way. It's a business expense and in the long term, you will get these funds personally on retirement.

From what I read transferring the company profit to your Property SPV (Wholly owned) would mean your company wouldn't make any profit, thus no corporation tax. Your SPV buys the BTL and any profit it makes over time is taxed, but you effectively get to purchase your BTL before Corporation tax. In effect deferring your profit until a time when it makes sense to sell the BTL and extract your money, hopefully at a lower tax rate. Or have I completely mis-understood?

[BlasterBates]

From what I read transferring the company profit to your Property SPV (Wholly owned) would mean your company wouldn't make any profit, thus no corporation tax. Your SPV buys the BTL and any profit it makes over time is taxed, but you effectively get to purchase your BTL before Corporation tax. In effect deferring your profit until a time when it makes sense to sell the BTL and extract your money, hopefully at a lower tax rate. Or have I completely mis-understood?

A purchase of a BTL is capital expenditure i.e. it doesn't get subtracted from the profit.

[Lockhouse]

Or have I completely mis-understood?

Yes. As others have said, you have to pay Corp tax first then you can do your SPV. Think hard about it though, if it was that good we'd all be doing it - and we're not.

NLUK has the better option. Get yourself a few quid in readies first in case gig number 2 takes a while to come along.

Maybe next year bung a few quid in your pension.

[psychocandy]

Hi,

I have recently started contracting. My accountant suggested that I don't pay myself this year as I will be in the higher tax levels. Instead he suggested I leave the money in the company, and extract the money at another time when I can do so more tax efficiently.

This sounded all good advice, but then I figured out that my company would make a decent profit for which I would have to pay corporation tax on. A page I read on this website (IFA's guide to avoiding the new dividend tax :: Contractor UK) suggested setting up a wholly owned subsidiary of my company and buying a Buy-to-let by transferring profits from my main company to the subsidiary.

All makes sense, but I wonder if it has to be this complex? Couldn't I just buy a bond (or other investment) rather than a buy to let? The cashflows would be fairly similar to buying a house, taking rent then selling it. OR is it that the bond would be seen as mechanism to lower my tax while the Buy-to-Let would be a legitimate business move.

I intended to get a buy to let, next year but perhaps not before Apr 2017. However if it has the effect of lowering my overall tax I will obviously do it well before Apr 2017.

Regards

Assuming because you have other income which takes you up to the 40% rate? Otherwise its nuts not to pay salary/divs up to this?

Also, married? Does wife have job/income? Depending on how much she earns may be worth splitting divs....

E.g. My dear wife works part-time and earns about £12-£13K. I pay salary of £9K or whatever it is this year. So thats £60K of dividends (£30K each) until dear wife is up to 40%. Even then I can pay another £8K with just wife paying higher rate unti I have to as well.

So thats £77K of company income accounted for at mostly lower tax rate. Throw in expenses for me about £12K a year. Chuck pension as well and, for me, thats up to about £100K - I never pay 40%.

[ChimpMaster]

Looks like you have a lot to learn here. To be fair, we're all always learning and it's good that you're looking at your options already.

So your company earns contract income.
Company expenses include your salary and expenses.
Your company pay CT on the profits.
Your company pays the shareholders a dividend from the profits.
The rest is retained profit.

You can then loan the retained profit to an associated company like a SPV.

[Jessica@WhiteFieldTax]

From what I read transferring the company profit to your Property SPV (Wholly owned) would mean your company wouldn't make any profit, thus no corporation tax. Your SPV buys the BTL and any profit it makes over time is taxed, but you effectively get to purchase your BTL before Corporation tax. In effect deferring your profit until a time when it makes sense to sell the BTL and extract your money, hopefully at a lower tax rate. Or have I completely mis-understood?

Misunderstood alas. Any transfer to a SPV is in lieu of dividend and post Corporation Tax. You will defer Dividend Tax, however the conundrum is that when then BTL unwinds be it 5 years or 50 years, you've then got CT on the capital profit in the company followed by either CGT or Dividend Tax on its extraction.

The sad fact is that if you are expecting capital appreciation you are probably best off taking the hit in Dividend Tax now and allowing capital growth to take place in the more benign personal tax regime.