Extracting funds from a limited company through rent

[theinvestor]

Can I do the following:

I own a company called SHOES LTD (a completely separate legal entity) which sells shoes. It rents the shop to sell shoes from me John smith. Shoes Ltd makes a profit of £30000. But instead of declaring it as profit it pays it to me as rent (after I John smith invoice shoes Ltd for £30000 rent and have a relevant leasing contract and agreement drawn up and signed by both parties consenting). Hence no profit and no NI contributions and no dividends, no corporation tax. Zero profit! Me John smith receives £30000 rental income which I duly declare and pay 20% on 239965 after having a personal tax free allowance £6,035. This way i would save around 2%, as tax on rental income is 2% lower than corporation tax (2009 to 2010).

Would this work?

I know this is slightly different from a straightforward residential landlord question but i wanted to know if someone has any experience in this are.

All names and companies used in this example are completely fictional.

[plym77]

providing it isn't over-inflated rent, there is no problem with this. Many people rent thier commercial property to a business. If you have any borrowings you may wish to try and structure the loans you have so that they are qualifying against the property and thus, reduce your income tax further.

If you business starts to make a larger profit and you want to extract income at higher rate levels then there could be merit in considering putting the commercial property in to a pension fund for yourself. There could be higher rate tax relief on the contribution, but you need to watch the CGT issues to. The income would then be generated within the pension fund.

If your total income for the year is around £30k then pension planning with the property may be a little time off, but is one to consider for the future.

Hope this helps

Sherena

[theinvestor]

thanks

[plym77]

I have just been looking at the new entrepreneurs relief (replacement for business asset taper relief) and thought I ought to add a post script here.

Unlike under BATR, for ER to apply on the eventual sale of the property used by your trade:

- it must be sole around the same time as the business itself

- If any rent has been charged by the person to his trading company - this will need to effectively apportion the ER availability - and if market rent charges, this will mean ER is not available

- if the property has not been used throughout its ownership by the business, ER will be apportioned

It is not as basic as this, but is a basic general test for idea purposes. ER calculations on the disposal of a commercial property used in your own business are therefore quite complex, with a number of issues to take into account.

In the past, it had always been fine to charge rent to your company, effectively dropping out cash without the NIC charge that salary attracts, and then offsetting relevant mortgage interest (which of course if there is no rent charge, could not be offset). However the new rules under ER are not so generous and therefore before you decide to rent the property to your business you need to weigh up the two positions, together with your future plans. Making the wrong decision could mean getting no releief for loan payments on one hand, or hiking your eventual CGT bill by up to 80% on the other.

I would recommend that now the new ER rules are in, that you get proper tax advice on this subject, reviewing your individual position as to make the worng decision could be costly.

If you are looking for specific advice, please feel free to contact me further on sherena.glanton@bdo.co.uk

In the meantime, I hope this helps.

Sherena