locutus
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Post by locutus on Jun 8, 2016 15:16:57 GMT
I decided to start a fresh thread and set aside the CIC question for the time being. I wanted to understand why some people have chosen to invest in P2P via a company and not as an individual. It seems to me that the only benefit of investing through a company is: - Lower initial tax (CT instead of IT) so more to reinvest and grow through compounding
- Can stagger dividends to be more tax efficient (e.g. take a year off work with no other income but can still take advantage of otherwise unused tax allowances)
- Possibility of adding spouse as employee to extract cash from the company and again take advantage of their unused tax allowances
If you ignore these advantages, it seems the tax situation of using a company is neutral if not slightly disadvantageous. Can people validate my calculations and or provide other reasons for investing via a company (disclaimer: I don't have £1,000,000!  The number is sufficiently high to have a self-contained example and still hit higher rate tax brackets for people with income from elsewhere.)
Invest as a Company
- £1,000,000 at 12% interest generates £120,000
- Pay yourself a small £11,000 salary which results in zero income tax but £352.80 and £398.54 in NICs
- The remaining £108,601.46 results in £21,720 CT
- Pay yourself the remaining amount as a dividend. £86,881.46 extracted as a dividend will result in £19,861.47 "Dividend Tax"
- Total tax paid as a company and individual to extract all cash: £42,332.82
Invest as an Individual (no other income) - £1,000,000 at 12% interest generates £120,000
- No NICs and only IT to pay which comes to £41,200
- Total tax: £41,200
Thoughts? |
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SteveT
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Post by SteveT on Jun 8, 2016 15:37:37 GMT
The benefits aren't enormous (although there are some platform-specific twiddles, like the FS SM). However, by drawing a salary of £8k (between the NI LEL and the NI PT), I accrue another year of state pension entitlement without any NI being due.
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Monetus
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Post by Monetus on Jun 8, 2016 16:49:44 GMT
- If you plan on reinvesting your money, you can keep your funds inside an Ltd and only pay 20% corporation tax (soon to be 18%) each year instead of a higher personal tax bracket. This means your capital compounds and grows faster.
- If you have other income sources (such as another Ltd company or job) you can defer income to a more advantageous time whereas you can't do this with your personal investments.
- Capital gains tax was cut to 20% recently which means you could potentially shut your company down at a later date and draw all of your profit out in one go and potentially save some tax if the circumstances are right...
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stevio
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Post by stevio on Jun 8, 2016 18:48:12 GMT
Not everyone CHOOSES to invest via company vs personally, surplus funds often build up as not tax effecient to remove yet, so invest surplus and then:
- drip feed out company via salary under tax thresholds - x2 if spouse, even pay to children, family etc. Virtually a pension. Pass on company to family as inheritance
- make company pension contributions which offsets CT so possibly pay no tax - even better if into SIPP allowing P2P investment
- dissolve via EPR and 10% CGT
- sell company
Etc etc etc
A company merely gives more possibilities of avoiding tax and/or choice of when pay tax
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sl125
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Post by sl125 on Jun 9, 2016 7:42:56 GMT
"
Invest as a Company:£1,000,000 at 12% interest generates £120,000
Invest as an Individual: (no other income) £1,000,000 at 12% interest generates £120,000
"
That's because your initial assumption of the investment amount is incorrect.
The cash available for investment through a company is before it has been drawn as income, whereas the cash available for investment as an individual will have had to have been previously drawn as income and therefore subject to income tax, NI etc. before you invest it.
Ie.
If I had £1,000,000 in my company as surplus cash, I could invest the whole of that £1,000,000 through the company. But to invest as an individual I would have to firstly draw it down from the company and pay tax on that, leaving only (to keep things simple) about £600,000 to invest as an individual.
So, in simple terms: your starting investment in a company is already nearly 50% higher than investing the same money as an individual. Then you get the advantage of compounding through deferred taxation (ie. paying corp tax of 20% on the profits whilst in the company, and only taking an income tax hit eventually when you take it out many years later).
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locutus
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Post by locutus on Jun 9, 2016 13:25:24 GMT
" Invest as a Company:£1,000,000 at 12% interest generates £120,000 Invest as an Individual: (no other income) £1,000,000 at 12% interest generates £120,000 " That's because your initial assumption of the investment amount is incorrect. The cash available for investment through a company is before it has been drawn as income, whereas the cash available for investment as an individual will have had to have been previously drawn as income and therefore subject to income tax, NI etc. before you invest it. Ie. If I had £1,000,000 in my company as surplus cash, I could invest the whole of that £1,000,000 through the company. But to invest as an individual I would have to firstly draw it down from the company and pay tax on that, leaving only (to keep things simple) about £600,000 to invest as an individual. So, in simple terms: your starting investment in a company is already nearly 50% higher than investing the same money as an individual. Then you get the advantage of compounding through deferred taxation (ie. paying corp tax of 20% on the profits whilst in the company, and only taking an income tax hit eventually when you take it out many years later). Sorry, perhaps I wasn't being clear. I wasn't talking about using an existing company to invest funds. My example is specifically aimed at those who currently invest in P2P personally and considered setting up a limited company to shelter the profits and manage their taxes more efficiently. For a company which already has excess funds, it is a no brainer. Another benefit I realised is that if you set up a company to manage your P2P investments, using my example above, the first £1 million extracted from the company will not be personally taxed as it is merely a repayment of shareholder funds.
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Post by wickedxuk on Sept 24, 2016 12:24:25 GMT
" Invest as a Company:£1,000,000 at 12% interest generates £120,000 Invest as an Individual: (no other income) £1,000,000 at 12% interest generates £120,000 " That's because your initial assumption of the investment amount is incorrect. The cash available for investment through a company is before it has been drawn as income, whereas the cash available for investment as an individual will have had to have been previously drawn as income and therefore subject to income tax, NI etc. before you invest it. Ie. If I had £1,000,000 in my company as surplus cash, I could invest the whole of that £1,000,000 through the company. But to invest as an individual I would have to firstly draw it down from the company and pay tax on that, leaving only (to keep things simple) about £600,000 to invest as an individual. So, in simple terms: your starting investment in a company is already nearly 50% higher than investing the same money as an individual. Then you get the advantage of compounding through deferred taxation (ie. paying corp tax of 20% on the profits whilst in the company, and only taking an income tax hit eventually when you take it out many years later). Sorry, perhaps I wasn't being clear. I wasn't talking about using an existing company to invest funds. My example is specifically aimed at those who currently invest in P2P personally and considered setting up a limited company to shelter the profits and manage their taxes more efficiently. For a company which already has excess funds, it is a no brainer. Another benefit I realised is that if you set up a company to manage your P2P investments, using my example above, the first £1 million extracted from the company will not be personally taxed as it is merely a repayment of shareholder funds. That's an interesting point locutus. I am considering the option of setting up a Ltd as I am a higher rate tax payer and I've pretty much already used up my wife's tax allowance in both surplus p2p and rental income from our BTL properties. I would be interested to see some input from investors who have done this already. I'm interested not in the company paying a salary but more as a long term pension pot. I.E the idea of the company paying into a SIPP that is then used as a personal pension. Rather then drawing a salary. But your comment regarding the first 1m been repayment of shareholder funds is interesting as it does mean that if in 5/10 years the strategy changed you could potentially use this to extract funds. I am also considering using the same Ltd company to buy property to expand my BTL portfolio. Especially with clause 24 and the budget changes. Even the judicial review have reduced the requested outcome/result to the clause 24 changes applying only to those properties purchase after Apr 17 buying more as an individual is looking less cost effective. Has anyone started a Ltd company to invest in P2P from this forum yet?
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Greenwood2
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Post by Greenwood2 on Sept 25, 2016 6:51:58 GMT
If you were using the company only for lending you might well need a Consumer Credit Licence, that would involve a lot of paper work.
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SteveT
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Post by SteveT on Sept 25, 2016 10:02:42 GMT
I re-purposed an existing (near dormant) company as a vehicle for P2P lending because I found myself with access to a chunk of capital for a few more years at minimal cost. The annual tax advantages of doing so are pretty minimal (unless/until the CT rate is lower than the basic IT rate, of course) and the accounting burden is considerable, even when married to my Company Secretary & book-keeper. However, by drawing a modest salary between the NI LEL and NI PT, I accrue additional years of state pension credit at no cost that I would otherwise miss out on. Were it not for that, it wouldn't be worth the admin hassle, IMHO.
ps. @leopardcat , I should keep your fingers crossed that HMRC don't pick out your company for a detailed tax audit!
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arbster
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Post by arbster on Sept 25, 2016 10:17:57 GMT
However, by drawing a modest salary between the NI LEL and NI PT, I accrue additional years of state pension credit at no cost that I would otherwise miss out on. Were it not for that, it wouldn't be worth the admin hassle, IMHO. This is the main reason I have considered setting up a Limited company for my wife, but I don't currently make enough profit to pay anything above the NI LEL, and with the imminent removal of reduced rates of NI, I had decided it wasn't worth it.
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adrianc
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Post by adrianc on Sept 25, 2016 10:34:34 GMT
You can rent space in your home to your company - free income and creates a cost against tax inside the company. With CGT implications.
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david42
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Post by david42 on Sept 25, 2016 13:24:14 GMT
But you do have the costs of accounts being done each year - they have to be audited so need to be done by an accountant IIRC rather than just yourself. If the company assets are under £3.26 million you do not normally need an audit: www.gov.uk/audit-exemptions-for-private-limited-companies
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Post by justdabbling on Sept 25, 2016 17:33:21 GMT
I recently set up a limited company to buy an off plan flat, ready 2018 for BTL. I note you can tart between banks to keep the business account costs very low. You can rent space in your home to your company - free income and creates a cost against tax inside the company. The company can pay up to £150 per head for annual events eg Xmas, birthdays, so you can effectively subsidise some spending you would have done anyway tax free against any profits. Even if you have no profits (like me for 2 years, I can create a loss to carry forward). The spending has to be on employees so you need to make partner/friend a director, or secretary ... Take your computer and wifi into the company - you can claim the capital value of the computer, and the wifi/phone rental (or you can claim part usage of your costs for the home) If you drive anywhere or have costs associated with DD, these can be claimed. Your own company money is usually your own taxed income going in "director's loan" and what you withdraw from that is tax free. you can do some marketing....get an top of the range North Face jacket and get your company name or logo on it - the cost is borne by the company. But you do have the costs of accounts being done each year - they have to be audited so need to be done by an accountant IIRC rather than just yourself. I know that these are all marginal "perks" but when you work for the NHS, these things look amazing! I have enjoyed most of these benefits for my usual work as an education consultant without setting up as a limited company. If the revenue from a particular business is less than about £82000 there is no need to give a breakdown of the expenses and the purchase of new computers and even cars can come under capital allowances. Some of my work was taken into a payroll and now that I am working less the self employed revenue less expenses creates a loss which is set against the employed earnings and I receive a tax rebate of some of the tax paid via the payroll. I have never used an accountant and perhaps I have been lucky in that in over 20 years my tax returns have not been queried.
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nick
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Post by nick on Sept 25, 2016 20:22:38 GMT
I decided to start a fresh thread and set aside the CIC question for the time being. I wanted to understand why some people have chosen to invest in P2P via a company and not as an individual. It seems to me that the only benefit of investing through a company is: - Lower initial tax (CT instead of IT) so more to reinvest and grow through compounding
- Can stagger dividends to be more tax efficient (e.g. take a year off work with no other income but can still take advantage of otherwise unused tax allowances)
- Possibility of adding spouse as employee to extract cash from the company and again take advantage of their unused tax allowances
If you ignore these advantages, it seems the tax situation of using a company is neutral if not slightly disadvantageous. Can people validate my calculations and or provide other reasons for investing via a company (disclaimer: I don't have £1,000,000! The number is sufficiently high to have a self-contained example and still hit higher rate tax brackets for people with income from elsewhere.)
Invest as a Company
- £1,000,000 at 12% interest generates £120,000
- Pay yourself a small £11,000 salary which results in zero income tax but £352.80 and £398.54 in NICs
- The remaining £108,601.46 results in £21,720 CT
- Pay yourself the remaining amount as a dividend. £86,881.46 extracted as a dividend will result in £19,861.47 "Dividend Tax"
- Total tax paid as a company and individual to extract all cash: £42,332.82
Invest as an Individual (no other income) - £1,000,000 at 12% interest generates £120,000
- No NICs and only IT to pay which comes to £41,200
- Total tax: £41,200
Thoughts? The tax advantages of setting up the activity within a company has been greatly eroded over the past year by the abolition of tax credits on dividends and the tightening up of the tax treatment of distributions on company wind-up. Your calculations above show that the abolition of tax credits results in a very marginal benefit in undertaking the lending in a company and extracting funds via salary and dividend. However, the main tax benefit of undertaking activities in a company had been that you could accumulate your profits in the company and realise this as a capital gain on wind-up of the company at a CGT rate of 18/28% (now 10%/20%) or 10% if you were eligible to entrepreneurs relief (ER). Given the increasing disparity of CGT and IT rates, HMRC has been cracking down on the treatment of final distributions on liquidation so that it is harder to characterise these as capital versus income. In particular, if a person that receives the final dividend on liquidation undertakes (or a connected party undertakes) a similar activity with a different entity, in employment, or in an individual capacity within 2 years of the distribution, the distribution will be retrospectively treated as income and taxed as such. This would force you to take a 2 year break from P2P when you liquidate your company. There is also a big question mark over whether ER is available as this relief is not available for any companies that have a significant (>25% income/assets) non-trading activity (all investment activity is non-trading). You would need to satisfy HMRC that your P2P activity was not investment but trading activity - likely to dependent on your level of activity/number and frequency of transactions etc etc. However, even the highest CGT rate of 20% is way lower than the highest marginal income tax rate of 47% (including 2% NI). Overall I only think undertaking P2P activity in a company is worthwhile if you are looking at £100k+ income and you can afford this to accumulate for several years before eventual extraction as capital on liquidation. The tax advantage of the distribution on liquidation as capital versus income is significant, even if ER is not obtained. Otherwise, if you are extracting cash out as salary/dividend every year the financial benefit is marginal and whilst it does give you more flexibility to manage the timing of income, the administrative burden/cost probably outweighs the benefits.
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Post by gaspilot on Oct 8, 2016 12:47:20 GMT
Quick question.
If a company loses money in P2P investments one year can this loss be incorporated into the overall profits of the company, thereby reducing the corporation tax that needs paying?
For personal taxation the losses can only be offset against other P2P investments AFAIK, albeit in different years if needs be.
I'm thinking of defaulted loans specifically. Obviously, if the defaulted loan gets recovered in the future, either fully or partially, then tax will need to be paid on that.
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The number is sufficiently high to have a self-contained example and still hit higher rate tax brackets for people with income from elsewhere.)
