Key tax points on dividends and buy-to-let
Craig Coyle, of Campbell Dallas, highlights the need for tax practitioners to give clients the right advice on dividends and buy-to-let following recent changes. Craig will be speaking at the ICAS Tax Conference – Taxing Times, on 24 May in Glasgow.
Practitioners will have seen a significant impact on their clients recently from changes to the taxation of dividends and also to the taxation of landlords with buy-to-let properties.
All general practitioners will have clients who are unhappy with these changes (given that they will result in an increase in their tax bills), and at the conference we will be discussing how best to seek to advise clients in these circumstances.
The increase in tax on dividends will impact on almost all owner managed businesses which are structured as limited companies. The usual advice historically to such clients was to remunerate themselves by a small salary with the balance extracted by means of dividend. The lower rates of tax on dividends together with the National Insurance saving meant this was almost always the “right” answer for the client, but the position is not always as clear now that the dividend tax rate has been raised.
The temptation for some clients would therefore be to live more frugally and extract less cash from their companies, with a view to realising a greater sum at the end of their period of ownership (whether by sale or liquidation) under capital gains tax rates, and in particular Entrepreneurs’ Relief at 10%. However, changes to the rules on Entrepreneurs’ Relief (which to some extent are simply underlining routes of challenge which were always available to HMRC) mean that the 10% rate may not be available where the company has too much cash on disposal.
Similarly, HMRC is keen to clamp down on those who liquidate their company to obtain the 10% rate and then “phoenix” a new company to carry on the same trade, thus seeking to effectively withdraw their income at 10%. Practitioners need to make sure their clients are properly advised of the potential difficulties in obtaining ER.
Landlords who hold properties personally, rather than through a limited company, are faced with the restrictions on the deductibility of interest which will increase their tax liabilities. One thought might therefore be to seek to move the properties into a limited company, but the associated capital gains tax and LBTT (with supplement!) costs mean that the short-term cost of doing this may be too painful to allow for the long-term benefit to be realised.
With the ATED threshold likely to affect more properties in future if prices rise, practitioners again need to ensure that clients are being properly advised on the structure in which they own properties for rental. Incurring the costs of moving to a limited company and then selling may lead to the worst of all worlds!
We look forward to discussing these and other issues, particularly around recent HMRC enquiry activity, with practitioners at the conference.
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