If you buy a property to make improvements and sell for a profit then you’re a trader, however if you buy a property and rent it out and wait till the value increases over the years then you’re an investor.
It’s important to distinguish between the two, as if you are a trader your gains on the improvements to the property well be taxed as income tax and not as capital gain unless you can prove that you intended to rent the property out.
Also when you own a property personally, your rental profits are taxed at your personal tax rate and when you sell the rental property then you pay capital gains tax (CGT) at either 18% or 28% or a combination of the two again depending on your level of income.
However, if you own a properties via a company then your company’s profits and capital gains are taxed at 20% assuming the profits are less than £300,000 a year.
Another benefit of accruing properties into a limited company is the finance cost restriction announced by the chancellor in the summer budges 2015, where individual landlords won’t be able to claim the cost of their mortgages on their rental properties, although a 20% basic rate tax relief will be introduced, limited companies are exempt from this and can still claim 100% of their finance costs.
Rental profits in the company can either be taken out as dividends or left in the company to invest in the next property, For further information please contact us on firstname.lastname@example.org.
IR35 was introduced by HMRC in April 2000, This legislation aims to identify individuals that are using a 'personal service company' (PSC) as an intermediary to avoid paying the correct tax and national insurance and get an unfair advantage according to HMRC, who view these individuals as “disguised employees” rather than self-employed.
IR35 was introduced to allow HMRC to crack down on 'disguised employees' and stop the loss of tax and national insurance to the exchequer.
In order to assist businesses to distinguish between employees and self-employed, an employment status indicator (EIS) tool has been developed which can be found on HMRC’s website.
The engager and the worker are both responsible to distinguish the workers employment status as the engager would have to ensure that they fulfil the tax and national insurance contribution liabilities.
HMRC will look at both the way the work is carried out by the worker on daily basis and the written contract between the parties to determine whether they are caught by IR35,
The main assessment criteria’s are:
The degree of Supervision, Direction or Control over how the worker completes their tasks is another test to clarify ones employment status.
A Self-employed worker may be asked to perform a particular task or provide a service at a specific time and location but it’s not likely for the client to have control over how the task is performed although this doesn’t affect the rights of the client (engager) to request the work carried out to be of certain quality.
An employed person on the other hand are likely to be told where and how to perform their tasks and is subject to a high degree of control.
Finally mutuality of obligation is another area for HMRC to determine an individual’s employment status. A self-employed contractor would benefit from providing their services efficiently and moving to another assignment or task and would not be entitled to expect further work form the same engager. However an employee would be supplied with continues supply of work form the employer and would be expected to carry out the task when he is required to do so.
When work is regularly provided to a contractor HMRC may take the view that an employee status has been created by custom and habit and as a result a great emphasis is been place on the right of the contractor to walk away from a contract early, if they choose to.
For further information please contact us on email@example.com.
The main reasons to incorporate are to limit liability and because it can be more tax efficient.
Limited liability means that any debt the company has is not yours personally, while as a sole trader you are personally liable.
As a limited company director you could draw from the company using a combination of wages and dividends, while making savings on the amount of taxes paid, although this has reduced in recent years.
You could draw a basic salary and take the rest of your earnings out of the company as dividends, you don't pay national insurance contributions on dividends and the tax rates are calculated differently.
Another reason to incorporate is your customers perception and professional image of your business. Some larger organisations also prefer to work with companies rather than individuals.
One of the main issues to consider when deciding to incorporate is your turnover, for further information please contact us on firstname.lastname@example.org.