Tax question (Renting property and running a business)
Discussion
What would the tax implication be of renting out your home at less than it was costing (mortgage) when living in other rented property - so only owning on place?
I'm currently PAYE paying 40% tax. I'm buying a franchise but getting someone else to run it. Again what is the tax situation if the business isn't paying me any money but paying the wages of the person who is running the company?
Also do I have to give them a contract and sort their tax or could they be selfemployed and sort themselves out?
I'm currently PAYE paying 40% tax. I'm buying a franchise but getting someone else to run it. Again what is the tax situation if the business isn't paying me any money but paying the wages of the person who is running the company?
Also do I have to give them a contract and sort their tax or could they be selfemployed and sort themselves out?
woodytvr said:
That should be okay then.
Mortgage is about £1000 (a tad more) per month. Last years statement says we paid £12k ish with £8kish being interest. Monthly rent will be about £700 so should be able to off-set it all against interest.
Mortgage is about £1000 (a tad more) per month. Last years statement says we paid £12k ish with £8kish being interest. Monthly rent will be about £700 so should be able to off-set it all against interest.
Also remember that you cannot offset rental losses against "earned income" so this effectivly means that there is no additionla tax to pay on the rent income.
Your other question is a bit more complex, and depends whether the business is run as a sole trader or company. The point about the other guy being self-employed and sorting his own tax out is also a bit of a can of worms too............more detail needed!
Regarding the rental of the house there are a number of issues, tax and otherwise -
you need to check with your mortgage lender to ensure that you CAN rent out what had been your home. The terms of the loan may need to be changed to accomodate the change of use of the house.
as has been pointed out already, on the assumption that you can rent out the property, you will pay tax on the rental income received during each tax year the property is rented out. You can, of course, deduct allowable expenses from the rent before working out the tax liabilities arising. These expenses include -
mortgage INTEREST paid each uear (note, it is only the interest element of the loan repayments that can be offset)
any other property related costs met by the landlord (as opposed to costs met by the tenant). These would include repairs, maintenance, council tax and water charges, insurance, management charges, accountancy fees etc etc.
If the rental situation shows a loss in any given tax year, you can carry the loss forward to offset against the following and subsuquent years' rental profits. Rental losses cannot be offset against non-rental income.
If the property is rented out for over three years, you will start moving into Capital Gains Territory. At the moment the house would be exempt from CGT if sold - as it is your main home. However, once you rent it out it loses that status - even if the property YOU are now living in is rented.
However, the first three years of the period the property is rented out would be counted as exempt when calculating CGT.
I'll look at your other points later.
you need to check with your mortgage lender to ensure that you CAN rent out what had been your home. The terms of the loan may need to be changed to accomodate the change of use of the house.
as has been pointed out already, on the assumption that you can rent out the property, you will pay tax on the rental income received during each tax year the property is rented out. You can, of course, deduct allowable expenses from the rent before working out the tax liabilities arising. These expenses include -
mortgage INTEREST paid each uear (note, it is only the interest element of the loan repayments that can be offset)
any other property related costs met by the landlord (as opposed to costs met by the tenant). These would include repairs, maintenance, council tax and water charges, insurance, management charges, accountancy fees etc etc.
If the rental situation shows a loss in any given tax year, you can carry the loss forward to offset against the following and subsuquent years' rental profits. Rental losses cannot be offset against non-rental income.
If the property is rented out for over three years, you will start moving into Capital Gains Territory. At the moment the house would be exempt from CGT if sold - as it is your main home. However, once you rent it out it loses that status - even if the property YOU are now living in is rented.
However, the first three years of the period the property is rented out would be counted as exempt when calculating CGT.
I'll look at your other points later.
Edited by Eric Mc on Thursday 11th January 08:06
If you are "employing" an individual to run your franchise business, then that person is an "employee" and you will have to deduct PAYE and NI on whatever he/she is paid.
It is not within the power of a business owner or worker to "choose" between "employment" or "self-employment" status. Their status is determined by fact, not opinion or wish.
What you choose to pay the individual is a different matter, of course - although you must take into account the Minimum Wage Regulations when arriving at an agreed rate.
Whatever you pay the employee will be a deductable cost of the business and will serve to reduce the business' overall tax liabilities.
How the business pays tax depends on the business vehicle you choose to set up to run it.
If it is a sole-traderrship YOU will pay Income Tax on the profits of the business through Self Assessment.
If it is a partnership, you will pay personal Income Tax on your SHARE of the business profits through the Self Assessment system.
If it set up as a limited company, the company pays its own Corporation Tax on the profits. YOU pay personal Income Tax on the money you WITHDRAW from the company. If you draw a salary, the tax (and NI) will be handled through the company's PAYE system. If you pay yourself a dividend, you pay tax on the dividend through the Self Assessment system.
It is not within the power of a business owner or worker to "choose" between "employment" or "self-employment" status. Their status is determined by fact, not opinion or wish.
What you choose to pay the individual is a different matter, of course - although you must take into account the Minimum Wage Regulations when arriving at an agreed rate.
Whatever you pay the employee will be a deductable cost of the business and will serve to reduce the business' overall tax liabilities.
How the business pays tax depends on the business vehicle you choose to set up to run it.
If it is a sole-traderrship YOU will pay Income Tax on the profits of the business through Self Assessment.
If it is a partnership, you will pay personal Income Tax on your SHARE of the business profits through the Self Assessment system.
If it set up as a limited company, the company pays its own Corporation Tax on the profits. YOU pay personal Income Tax on the money you WITHDRAW from the company. If you draw a salary, the tax (and NI) will be handled through the company's PAYE system. If you pay yourself a dividend, you pay tax on the dividend through the Self Assessment system.
Right, thank you, I think I've got it.
The franchise is to be purchased by my wife to run with her sister. My wife is employed and paying 40% tax. Until the business takes enough money to allow her to leave work she will work unpaid and any profit will be used to purchase larger areas of the franchise.
My sister in law will also be running the franchise (mostly her actually) and again won't take a wage as they want to pay off the loan they'll have to purchase the initial franchise (our loan) and then buy further areas with future money they make. Sister in law is currently stay at home mum and earns nothing.
We wanted to put franchise in my wifes name as we'll be doing the initial borrowing (from bank or similar). Also my wifes sister isn't currently in a very stable financial situation and is in an IVA (I think that's what it's called) situation. Obviously if she ends up going full on bankrupt or similar we don't want it to affect the franchise.
So, thoughts on that? LTD Co? Should we declare and interest of sister in law on LTD Co or just employer her through it?
Thanks again for your help.
The franchise is to be purchased by my wife to run with her sister. My wife is employed and paying 40% tax. Until the business takes enough money to allow her to leave work she will work unpaid and any profit will be used to purchase larger areas of the franchise.
My sister in law will also be running the franchise (mostly her actually) and again won't take a wage as they want to pay off the loan they'll have to purchase the initial franchise (our loan) and then buy further areas with future money they make. Sister in law is currently stay at home mum and earns nothing.
We wanted to put franchise in my wifes name as we'll be doing the initial borrowing (from bank or similar). Also my wifes sister isn't currently in a very stable financial situation and is in an IVA (I think that's what it's called) situation. Obviously if she ends up going full on bankrupt or similar we don't want it to affect the franchise.
So, thoughts on that? LTD Co? Should we declare and interest of sister in law on LTD Co or just employer her through it?
Thanks again for your help.
The obvious answer would have been a formal business partnership arrangement. However, with a potential IVA situation lurking in the background I don't think it's an option.
If you set up a limited company, your wife could become a director of the company and the sister in law could be a straightforward employee. As long as your wife takes no salary or dividends from the company, she will not pay any tax on income from the company as she is receiving no incomefrom the company.
The sister in law could be paid an appropriate wage as an employee which would be adminisitered by the company as an employer. To do this, the company would need to register for PAYE and process the salary paid to the sister in law on a monthly basis. The PAYE/NIC arising would be paid monthly - or quarterly, if the amounts involved are low.
If you set up a limited company, your wife could become a director of the company and the sister in law could be a straightforward employee. As long as your wife takes no salary or dividends from the company, she will not pay any tax on income from the company as she is receiving no incomefrom the company.
The sister in law could be paid an appropriate wage as an employee which would be adminisitered by the company as an employer. To do this, the company would need to register for PAYE and process the salary paid to the sister in law on a monthly basis. The PAYE/NIC arising would be paid monthly - or quarterly, if the amounts involved are low.
Thank you once again.
I presume there would be a minimum wage issue if she is an employee. Could my wife say run the business take no pay and plough everything back into paying off the loan and buying a larger area and pay no tax?
Obviously sister in law would be doing the physical work but not officially - No wage or expences.
I presume there would be a minimum wage issue if she is an employee. Could my wife say run the business take no pay and plough everything back into paying off the loan and buying a larger area and pay no tax?
Obviously sister in law would be doing the physical work but not officially - No wage or expences.
Directors of their own company are exempted from having to pay themselves the National Minimum Wage (although it took a lot of prodding of the Inland Revenue to get them to confirm this - lots of directors were panicking at first).
If you have an employee doing work for you you really should be paying at least the NMW.
If you aren't, you could be prosecuted by the Revenue (who are increasing their resources for tackling NMW misdemeanours and infringements). In addition, the employee would have a valid legal case against the employer if they weren't being paid at or above the NMW.
Don't forget that the company pays Corporation Tax in its own profits - irresepctive of what the directors withdraw from the company.
If you have an employee doing work for you you really should be paying at least the NMW.
If you aren't, you could be prosecuted by the Revenue (who are increasing their resources for tackling NMW misdemeanours and infringements). In addition, the employee would have a valid legal case against the employer if they weren't being paid at or above the NMW.
Don't forget that the company pays Corporation Tax in its own profits - irresepctive of what the directors withdraw from the company.
Edited by Eric Mc on Thursday 11th January 15:11
As has been stated, the loan repayment amounts do not count as allowable business expenses - therefore they are not used to reduce the prfits of a business. The only element of loan repayments that can be offset against profits are the interest charges.
Think of the logic.
If you are given loan of £100,000, you will not be taxed on that as "income". Conversely, when you give the £100,000 back to the lender (whether in instalments or all at once), you are not going to be given tax relief either.
Obnviously, if you are charged interset on the loan, say £15,000, then you will actually pay back to the lender £115,000 and you WILL be able to claim the £15,000 interest charge as a business expense.
Think of the logic.
If you are given loan of £100,000, you will not be taxed on that as "income". Conversely, when you give the £100,000 back to the lender (whether in instalments or all at once), you are not going to be given tax relief either.
Obnviously, if you are charged interset on the loan, say £15,000, then you will actually pay back to the lender £115,000 and you WILL be able to claim the £15,000 interest charge as a business expense.
The purchase cost of a franchise mainly consists of the purchase of an Intangible Asset, namely "Goodwill". The purchase of Goodwill is classified as "Capital" expenditure and it is therefore not possible to offset this cost as a direct deduction against profits in the business' Profit and Loss account. Instead, it is "Capitalised" as an Asset in the business Balance Sheet.
It is normal accounting practice to spread the cost of this Goodwill over a finite lifespan (say 10 years) by means of an annual "Amortisation" charge. However, the Revenue specifically DO NOT ALLOW this deduction to be taken into account when computing taxable profits.
Some capital costs, such as the purchase of Plant and Machinery, Office Equipment, Computers, Vehicles etc are eligible for Capital Allowances which do help reduce the taxable profits. Goodwill does not qualify for Capital Allowances.
If any part of the franchise fee relates to the purchase of equipment (including such things as software costs), then that element of the cost will be eligible for Capital Allowances.
It is normal accounting practice to spread the cost of this Goodwill over a finite lifespan (say 10 years) by means of an annual "Amortisation" charge. However, the Revenue specifically DO NOT ALLOW this deduction to be taken into account when computing taxable profits.
Some capital costs, such as the purchase of Plant and Machinery, Office Equipment, Computers, Vehicles etc are eligible for Capital Allowances which do help reduce the taxable profits. Goodwill does not qualify for Capital Allowances.
If any part of the franchise fee relates to the purchase of equipment (including such things as software costs), then that element of the cost will be eligible for Capital Allowances.
Edited by Eric Mc on Friday 12th January 12:49
Eric Mc said:
If the rental situation shows a loss in any given tax year, you can carry the loss forward to offset against the following and subsuquent years' rental profits. Rental losses cannot be offset against non-rental income.
Can rental losses be offset against non-rental income if the property (and other trade) is within a ltd company?
No. In this regard, companies operate under the same basic regulations as individuals - although the ultimate tax paid is Corporation Tax rather than Income Tax.
However, if a business (limited or non-limited, it doesn't matter) lets out a part of its business premises as a supplement to its main trading activity, then any profits or losses gained through its rental activity can be treated as part of its normal trading profits and losses. This situation is essentially a Revenue concession and does not apply if the business or business owner rents out a property which is not related to the trade.
However, if a business (limited or non-limited, it doesn't matter) lets out a part of its business premises as a supplement to its main trading activity, then any profits or losses gained through its rental activity can be treated as part of its normal trading profits and losses. This situation is essentially a Revenue concession and does not apply if the business or business owner rents out a property which is not related to the trade.
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