The Big Tax Squeeze - Mazars - United Kingdom

Regardless of who wins next year’s general elections, 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, asserts that now is the time to explore the options that will minimise the impact of the big tax squeeze.

20/01/2010

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 6th April next year, shadow chancellor George Osborne has stated that the move will not be blocked if the Conservatives are elected next year.

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 whip your property portfolio into shape and make sure it 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%, and 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 tactics 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 6th 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 31st March 2010 to bring forward profits into the tax year ended 5th 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 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.

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About Mazars:

A jpg image of Stacy Eden is available on request.

Mazars is an international firm specialising in audit, tax and advisory services that operates as an integrated partnership in 50 countries worldwide.

In the UK, Mazars is the eighth largest partnership in terms of audit fee income, has the fastest growing tax practice amongst the Top 20 firms.

The firm employs more than 1,100 people and has over 110 partners based in 18 offices throughout the UK.