How to cope with the new higher 50% rate of tax
Regardless of who wins the general election, the new higher 50% rate of income tax appears to be here to stay. Stacy Eden, head of property and construction at international accountancy firm Mazars, says that now is the time to explore the options that will minimise the impact of the big tax squeeze.
Although many high profile Conservatives have indicated that they are less than happy with the new higher rate of income tax for those earning more than £150,000 - which is due to be raised from 40-50% on 6 April - shadow chancellor George Osborne has stated that the move will not be blocked if the Conservatives come to power at the 2010 election.
In terms of repairing the nation’s battered finances, the increase to 50% sends out the right political message. However, the rise will come as a blow to some high earners as well as to property investors. With April looming on the horizon, there is no time like the present to make sure your property portfolio is as tax efficient as possible.
Here are ten tax-busting tactics for property investors ahead of the new rate:
1. Incorporate your business for lower tax rates
Company profits are taxed at 22-28%, rather than income tax rates of 50%. Therefore, for businesses looking to retain or reinvest rental or trading income, incorporation can warehouse profits at these lower tax rates.
2. Transfer of goodwill to a company to secure capital gains tax rate
The transfer of the goodwill of an unincorporated business to a company can crystallise tax at the relatively benign capital gains tax rates of 10-18%.
3. Admitting corporate members of a partnership or LLP
As an alternative to incorporation, the tax advantage noted above in points 1 and 2 can also be achieved by admitting a company as a member of an LLP or partnership. This structure could also provide the opportunity for capital gains to be diverted to individual partners, even if some or all income is attributed to the corporate partner.
4. Hold property investments outside of a corporate structure
It is normally beneficial to hold investment properties outside of a corporate structure to secure a single tier of taxation at capital gains tax rates of 10-18%. If you have companies with significant property investments, consider restructuring to hold the properties personally.
5. Accelerate dividend and bonus payments
Dividends declared and bonuses paid before the introduction of the new income tax rates on 6 April 2010 could be subject to lower income tax rates if earnings would otherwise be in excess of £150,000 – compare 25% to 36.1% for dividends and 40% to 50% for bonuses, not including National Insurance Contributions (NIC).
6. Change the business’ accounting period
For an unincorporated business, consider changing your accounting period to 31 March 2010 to bring forward profits into the tax year ended 5 April 2010, so that they are taxed at the current income tax rates.
7. Consider loans rather than dividends
Loans to participators in close companies suffer a refundable tax charge of 25%, but this is lower than the effective tax rate of 36.1% on dividends that might be payable going forward. However, if the participator is also an employee, he or she may be subject to tax as well on the benefit in kind of this ‘cheap’ loan.
8. Income splitting
Although this is still a hot topic with HM Revenue and Customs (HMRC), no legislation has yet been introduced to prevent income splitting between spouses. If a spouse does not have an income above the £150,000 threshold, there is an opportunity to transfer income generating assets to them, for example, shares in a company. This will restrict the levels of profits that are subject to the new higher rates of tax.
9. Pension contributions for persons with income below £150,000
An income between £100,000 and £113,000 will suffer income tax rates of up to 61.5% due to the gradual loss of the personal allowance. However, it is possible to claim full tax relief for contributions into a pension fund for persons with an income of less than £150,000.
10. Consider holding property investments outside of the UK
Non-UK domiciled Individuals could benefit by holding investment properties through an offshore company as with the right fact pattern, there may be no capital gains tax.
Whilst it would seem that the options available to property investors are fairly limited, a closer look reveals that there are several approaches that can be taken for you to hold on to your hard-earned cash.
Stacy Eden is head of property and construction at accountant Mazars