The way in which you run your business will affect the amount and type of tax and National Insurance that you pay. When deciding on an appropriate structure for a business, the tax and National Insurance regime under which the business operates is one of the factors that should be taken into consideration.
If you run your business as a sole trader, or as a member of a partnership, depending on the level of your profits, you will pay income tax and National Insurance contributions (NIC) on your profits. Your income tax liability is computed by reference to your total taxable income and if you have other sources of income, this will impact on your marginal rate of tax.
The following is an excerpt from our best-selling tax report How to Use Trusts to Reduce Property Taxes, to get the full report visit here.
Rent and Asset Sales
In some cases, the business premises are owned by one or more of the company’s shareholders, rather than by the company itself. If this is the case, they can charge the company a rent for the use of the premises. They will be liable for income tax on the rent paid to them, but like salaries, the rent paid is an allowable expense for the company and unlike a salary, no National Insurance contributions have to be paid on it.
It is important that the rent charged is not more than would be paid in the open market. If it is, the excess amount will not be an allowable expense for the company, and will instead be treated as a ‘distribution’ to the shareholder/landlord. Distributions are taxed like dividends, so that the company cannot deduct them for tax purposes. The recipient pays tax at a rate of 32.5% once the dividend allowance has been used up if he or she is a higher rate taxpayer.
Where the dividends fall within the basic rate band, the tax rate is 7.5% once the dividend allowance has been utilised. It makes sense for the company to have an appropriate formal lease from the property owner, so that the company can make alterations and do repairs without the risk of the property owner being taxed on the ‘benefit’ of the company doing the work for him.
There are, however, some downsides to this arrangement:
- entrepreneurs’ relief can reduce the rate of Capital Gains Tax (CGT) on the sale of shares in a trading company to 10%, and it can do the same for the sale of the premises by the landlord/shareholder. However, if the company has paid rent since April 2008 (when the rules changed) the proportion of the gain on which entrepreneurs’ relief can be claimed is restricted in proportion to the level of rent paid – if the rent is a peppercorn, there is no restriction, but if it is a full market rent, no entrepreneurs’ relief will be available on the sale of the property; and
- shares in a trading company will generally escape inheritance tax on the death of the shareholder, as they will usually qualify for 100% business property relief (BPR). If the business premises are owned outside the company, however, the rate of BPR on the premises is restricted to 50%, and even then, the relief only applies if the shareholder owns a controlling (over 50%) shareholding. For other shareholder/landlords, no BPR is available. The only good news is that married couples’ shares are added together for the purpose of deciding if they have control of the company.
By Sarah Bradford
This article was first printed in Business Tax Insider in May 2019.