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My clients' friend says ........

My clients' friend says ........

Husband and Wife run family business as Ltd Co. Genuine arrangement, both full time working directors and both 50% shareholders.

Ltd Co recently relocates to nice industrial unit owned by Husband and Wife personally.

Option to tax in place (by the way).

Friend has suggested that H & W should pay rent to themselves from the Co.

Personally, i think this is barmy as H & W can (currently) distribute surplus profits by dividend.

Anyway if they pay rent out of a Ltd Co to themselves doesn't this impact on Entreprenuers Relief in the future?

Thanks in advance for some clarification.

David Park

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15th Oct 2008 09:31

Also ...
you need to consider just how much the ER will be worth (i.e. the difference ebetween 18% & 10% on the potential gain) and whether this will be outweighed by the CT / NIC relief of charging market rents. If this was a relatively short-term situation there probably won't even be a capital gain!

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15th Oct 2008 08:36

Used to be a good idea
Paying rent has relief in the company at 22% (assuming small rates of tax apply) and taxed on the individual at 40% (assuming higher rate taxpayer). It is good for income tax and no NI.

The problem now is that there will be no entrepreneurs' relief when selling the property because it is restricted if there is an associated disposal in the future. That begs the question, will there be an associated disposal? If there will not be, the client has missed out on an income tax saving. If there will be and rent is charged there is an issue over entrepreneurs' relief.

Also, have you considered IHT? Would someone buying the business in the future want the property.

Enough questions to mean that you need to cover all the basis to stop a potential PI claim in the future and also, and more importantly, give the client the advice thay is best for them.

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By Anonymous
15th Oct 2008 08:15

Unclear about the entrepreneurs relief
Can you explain what you think the ER impact is of charging rent please.

Leaving ER to one side rent is more tax efficient than dividend as a way of extracting money from the company because it is allowable for CT but unlike wages there is no NI on it. Just CT relief at 21% and then icome tax charge at 20% or 40%.

Also if the couple have raised a loan to buy the unit the interest will be allowable against the rent.

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