An Insight into: 11 Tax ‘Myths’, busted by our experts
Our clients are a savvy lot, and want to get the most out of their businesses (and life!).
Here are the 11 most frequently asked questions we are asked about how to expertly combine your business and personal lives and our tax expert’s advice.
1. Can my company pay my nanny, cleaner or gardener?
Those employing the services of a domestic worker will usually fund the salary out of their net of tax income. However, what if you instead employed them through your company, by adding them to the company’s payroll?
By doing this, the salary would be treated as a benefit in kind, which means that it would be subject to personal tax on you, and Class 1A NIC (@ 13.8%) on your company. However, the full salary plus Class 1A NIC would then attract Corporation Tax relief.
Getting the company to pay the domestic worker will mean that you can then reduce your salary and/or dividends from the company, since you will need less income by not having to fund the domestic employee personally. This saves personal tax (and employees NIC (@ 12%), depending on salary level).
Furthermore, you have the cost savings of not having to run a separate payroll and pension scheme personally for your domestic workers.
2. Can my company pay my children’s school fees?
Yes, but the school fees will not be deductible for corporation tax purposes and paying them via your company could result in personal tax charges. However, there are several ways to pay less tax and at the same time pay less in private school fees.
This might involve Grandparents setting up a family company, putting income generating assets in the family company, such as property or investments and then naming the children as shareholders. The school fees are then paid by distributing dividends to the children. This could be tax free for the children because so long as they do not have any other earnings or income, they can use their personal tax allowance.
It is important that the grandparents create the business and not the parents. Parents cannot gift to children without incurring a tax charge.
This is a good way of paying for private school fees if the grandparents would prefer to help the grandchild during their lifetime rather than leaving their wealth as an inheritance.
Alternatively, grandparents wishing to help with school fees or wanting to make a tax efficient disposal of their assets could consider a Discretionary Trust for grandchildren.
An individual can give away up to £325,000 without incurring Inheritance Tax. By doing this it reduces their own estate by £325,000 thereby potentially saving 40% tax on this amount (£130,000). As a couple that amounts to £650,000, which is a serious contribution when it comes to the school fees. It takes seven years for a gift to fall outside their estate for Inheritance Tax purposes but provided they survive seven years then the gift no longer makes up part of the donors estate.
Income payments from the trust are paid net of income tax to grandchildren who can generally reclaim the tax paid by the trustees via their own personal allowances. There may also be savings or advantages when it comes to potential Capital Gains Tax (CGT) which, if it is payable on putting assets into trust, can typically be ‘held-over’ so that there is no tax charge until the assets are sold later.
At the age of 55, you can take 25% of your pension pot as a tax-free lump sum. This could be used to pay for the private school fees. If you are a higher or additional rate taxpayer, taking it as a lump sum is tax efficient as you will not have any additional tax to pay. You could leave the rest of the pension invested for your income in retirement. It is important to seek financial advice in this instance. This may impact on your income in retirement and could affect the amount of money you could contribute to a pension.
Some private schools offer the option to pay in advance as a lump sum, known as ‘advance funding.’ This could protect you from hefty inflation rises on fees in the future.
Another option that some schools offer is an investment scheme. You pay a lump sum in advance, then the school will invest the lump sum in low-risk investments. The returns on the investment are tax free for most schools, so long as they have charitable status.
In return for paying upfront parents are usually given a discount.
3. Can my company pay for my house extension? How about a swanky home office in the garden?
Many owner-managers were “working from home” before a global pandemic caused it to become the norm. You might therefore think that it is reasonable for your company to contribute to improvements to your house, or even to pay for one of these luxury garden offices. However, I’m afraid it is not that simple and there are several taxes at play here and care is needed.
Whilst a company can contribute to the running costs of a home office without triggering significant income or corporation tax liabilities (when done correctly – see question 5), if this is based on the premise that any part of your home, or garden, is used exclusively for business then it can restrict the CGT exemption available when you sell your home and trigger a liability to business rates. Therefore, we would always advise that the claimed business use is kept below 100%, lets say 5/7ths for ease. Unfortunately, this means that the remaining 2/7ths must be personal use and therefore there will be an element of personal use of any home improvements your company pays for, which will result in a taxable benefit in kind.
Additionally, the company will not receive any tax deduction for the expenditure – it will be capital in nature and no capital allowances will be available as it relates to expenditure on residential property. The only tax relief that may be available is a deduction against the proceeds on a sale of the property, but as the proceeds will be received by the property owner and the costs are in the company this won’t be available either.
Therefore, we would advise against this unless you are willing to treat the new office area as 100% business use and accept the associated CGT and rates consequences.
4. Can my company pay for life insurance for me and my family?
Life insurance is complex and there are many different options available – whilst we cannot advise on which policy to take out we can explain the tax consequences. When individuals take out life insurance for themselves the proceeds will be payable to someone of their choosing, generally their spouse and/or children. If a company were to pay the premiums on this sort of policy it would be tax deductible for the company but there is a clear personal benefit and therefore the costs will be a taxable benefit in kind for the director/employee.
Alternatively, companies can take out life insurance policies for directors or key employees which pay the proceeds to the company to cover the costs of running the business in the individual’s absence and replacing them. This is clearly a business expense and is tax deductible and would not give rise to a taxable benefit in kind for the individual covered by the policy.
There is also a specific type of policy, known as relevant life cover, which gives the best of both worlds – it is tax deductible for the company, there is no benefit in kind and the proceeds are payable to the family of the insured individual.
Our friends at IPFS can advise on all types of life cover and will be able to point you in the direction of a suitable policy.
5. Can my company pay a share of my mortgage and other household costs?
A company can meet any additional variable costs of an employee or director working from home such as increased electricity or heating costs, but they cannot meet any fixed overheads such as rent, mortgage interest or monthly broadband charges without triggering a taxable benefit or taxable remuneration. Alternatively they can pay a fixed allowance of £6 per week without triggering any tax or reporting requirements.
If there is significant home-working, then the company could enter into a rental agreement with the employee (and any other co-owners of the home) and any amounts paid under this agreement would not be taxable benefits. However, the amounts received by the home-owners would need to be declared as property income on their personal tax returns with a reasonable proportion of their home running costs being allowable deductions to offset against this income, with the aim of the net taxable income being minimal.
It is important to note that the proportion of running costs which will be allowable against the rent income need to be based on a reasonable estimate of the personal versus business use of the entire property, and if any part of the property is treated as being used exclusively for business purposes it will restrict the CGT exemption available when you sell your home, and may trigger a liability to business rates.
There are some pitfalls here so please do seek further advice before implementing this approach.
6. I’ve heard taking dividends is more tax efficient than salary – can I just swap?
Generally taking dividends is more tax efficient than salary, but the precise tax saving will depend on the circumstances and care is needed to avoid upsetting HMRC. There are also non-tax issues to consider.
The benefits of receiving dividends over salary are that dividends attract lower rates of income tax than salary (7.5% v 20%, 32.5% v 40% and 38.1 v 45%) and no NI contributions are payable on dividends (neither employer’s nor employee’s). There is also a tax-free dividend allowance (of £2,000 in 2021/22) in addition to the personal allowance meaning you can earn up to £14,570 of dividends before paying any income tax at all (subject to your other income).
However, there are some disadvantages:
- Dividends are not deductible expenses, meaning that the company will pay corporation tax on the profits used to pay the dividend as well as you suffering income tax on the amount received. The interplay of corporation tax rates and income tax and NI rates is what makes this such a complex question – at current rates the optimum solution is generally to take a nominal salary to utilise the income tax and NI free bands with the balance in dividends. However, the tax saving achieved will reduce when the corporation tax rate increases to 25% in April 2023 and any existing planning should be revisited at that point.
- Taking no salary will impact your NI contribution record and will restrict some of your state benefit entitlements.
- Unlike salary dividends are paid gross, and therefore they require the completion of a Self Assessment Tax Return and payment of tax in January and July of each year.
- Dividends can only be paid when a company has distributable reserves, meaning that your entitlement to income could disappear if the company hits a dry spell.
Additionally, HMRC can seek to tax dividends as employment income where they believe that the amounts received represent reward for services. Therefore, we would always recommend that office holders take some salary in return for their services and would advise against “swapping” to a majority of dividend income after taking a significant salary for a number of years.
7. Can I borrow money from my company?
Companies can generally lend money to whoever they wish, but where money is lent to a shareholder and/or employee there will be tax consequences. It should be noted that these rules do not only apply to formal loan agreements, they also apply to funds which are withdrawn from a company for the benefit of an employee or shareholder which are not taxed as salary or dividends such as personal expenses paid via the company bank account.
Starting with the income tax for employees including directors; the loan taken from the company will treated as a taxable benefit if the value of that loan exceeds £10,000 at any point in the tax year and a market rate of interest has not been charged. HMRC publishes an official interest rate for these purposes (currently 2% from 6 April 2021). If a loan is a taxable benefit it must be reported on form P11D at the end of the tax year and the employee will be subject to income tax and the employer national insurance on the benefit amount.
The tax implications for the company only arise where the loan is to a shareholder (or certain connected parties). A special type of corporation tax generally referred to as “section 455 tax” will be chargeable where the loan remains outstanding 9 months and a day after the end of the company’s year end. For example, if the year end for the company was 31st March 2020, then section 455 tax will become chargeable if the loan has not been repaid by 1St January 2021. Section 455 tax is charged at a rate of 32.5% on the outstanding amount. However, any tax paid can be reclaimed once the loan is repaid or written off by the company. If the loan is written off the amount is then classed as dividends and will be taxed accordingly.
8. Should I buy my home in a company? How about a holiday home or a house for the kids?
You can buy a residential property in a company but there are various tax consequences which need to be considered. The exact tax treatment depends what you intend to do with the property.
If you intend to use the property as your main home, then this is unlikely to be the best route. Any properties valued at more than £500,000 (as at 1 April 2017 or at acquisition if later) will be subject to an “Annual Tax on Enveloped Dwellings” (ATED) charge; the tax payable being based on the value of the property. Additionally, stamp duty may be payable at a higher rate on the property (15% if the value exceeds £500,000).
Additionally, the provision of accommodation would be a taxable benefit on which income tax and employers NI contributions would be due. This can be eliminated by paying the company rent for the use of the property but care is needed to ensure that sufficient rent is paid to completely eliminate the benefit.
Finally, any profit on a sale of the property would be subject to corporation tax as the exemption available to individuals on the sale of their main home is not available where the property is held in a company. The cash proceeds would also be in the company and there would be the usual personal tax consequences if these needed to be extracted.
If you were to buy a holiday home to let out this then the rules would be different. The property would not subject to the 15% stamp duty rate. The ATED charge and taxable benefit described above would arise if you were to use the property for a family holiday but the amounts would be pro-rated accordingly. Even if there is no personal use an annual ATED return would be needed to claim relief.
The company would pay corporation tax on the profits, currently at 19% but rising to 23% in 2023, and then you would suffer income tax if you were to extract the post-tax profits from the company. If the property was to qualify as a “furnished holiday let” (FHL) then it may qualify for favourable tax reliefs, such as Business Property Relief (BPR) and Business Asset Disposal Relief, and profits would also be classed as “net relevant earnings” for pension purposes. However, HMRC are increasingly challenging the categorisation of FHLs.
If the property is being acquired with a long-term view to retire by the seaside then a company may not be the best way to go – if it remains in the company then we are back to all the consequences of corporate ownership of your main home, and extracting the property into personal ownership will be expensive as it will be deemed to have been sold at market value by the company and SDLT and corporation tax will arise accordingly.
Buying a property for the children is likely to result in a “potentially exempt transfer” (PET) being made, so if you were to die within 7 years of the event, then the value of the house / company would fall back into your estate and may be subject to IHT at 40%. There are also rules which mean any rental income due to minor children will be taxable on the parents until the child reaches 18, nullifying any hoped for tax savings from utilising their personal allowances and basic rate bands. All of the above issues in relation to personal use of properties will also apply.
Where there is an intention for personal use of a property holding it via a company is unlikely to be tax efficient.
9. Can I move my property portfolio into a company to get 100% relief for mortgage interest?
Yes. Individuals are subject to the mortgage interest relief restrictions and are only given a basic rate tax credit on the interest. Conversely, companies are allowed are a 100% deduction against the rental income for the mortgage interest paid. However, it should be noted that the corporation tax paid on the profits together with income tax paid on extracting the income may result in little or no saving compared to an individual holding the rental property personally.
Additionally, there may be significant SDLT and CGT liabilities on transferring the property portfolio into the company as this will be deemed to tax place at market value for tax purposes.
Moreover, as set out in detail in question 8, there are several other tax consequences involved in holding residential property in a company which will need to be factored into any decision.
10. Can board meetings take place over an expensive meal, can it be somewhere hot?
Yes they can, but whether the cost would be deductible for corporation tax purposes is another matter.
Board meetings help a company to work out a business strategy and execute it successfully. As a general rule they should take place in the area that the board members and business is located and all have access to.
If you choose to have an expensive meal or go to a exotic location for the board meeting, the expenditure must be shown to be wholly and exclusively for the purposes of the trade, otherwise, similar to entertainment expenditure it would be added back for tax purposes.
For a UK company, there may also be tax consequences to holding board meetings outside of the UK, as it may be arguable that the company is not UK controlled. Ashcroft are happy to discuss any matters of this nature with you.
11. I’ve heard that there’s no benefit in kind charge for electric cars, so can my company buy me a Tesla?
It is correct that there was no benefit in kind charges for electric cars in the 2020/21 or earlier tax years. However, from April 2021 there will always be a benefit in kind charge for electric cars, even for cars with zero emissions. The tax rate starts at 1% and may rise to 14% depending on the electric range of the vehicle and when the car was first registered.
The government has announced that the starting rate will increase to 2% for the 2022/23 tax year and remain the same until at least 2024/25.
So, for example, if your company provides you with a car that was registered after 6 April 2020, is capable of more than 130 miles on battery power alone and has a list price of £70,000 the benefit in kind band for 2021/22 is 1% giving a taxable benefit of £700. A basic rate taxpayer will only pay £140 in income tax, increasing to £280 for a higher rate taxpayer. The company will also have to pay employers NI contributions at 13.8% on the benefit amount. Whilst this is not tax-free it is significantly lower than the tax arising traditional company cars.
Where a company purchases a new car with zero CO2 emissions it will be able to claim 100% tax relief for the expenditure in the year of acquisition. 100% tax relief is also available for expenditure incurred on installing electric charging points at the office, and the provision of charge stations is not a taxable benefit for employees even if there is personal use of the “fuel”.