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Just trying to get my head around tax...

You own a limited company, which in turn owns a rental property which makes £5000 profit each year. Within one financial year you reinvest all the profit on a new rental property owned by the company. 

In this example, is there any corporation tax to be paid? Or does the fact that you've reinvested the money mean that your business has no longer made an overall profit and therefore you don't have a corporation tax bill?

Thanks :-)

 

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In short you have to pay corporation tax on any profit regardless of what you do with them. obviously you can pay yourself a salary or various other things to minimise the profit. Also you will have to pay tax again if you take out company profit as dividends/salary etc

Its perfectly possible in a small ltd to make no profit for a period as you will have many expenses

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FWIW, in a small Ltd company, one that has a small profit as mentioned of "£5000 profit each year", just be careful & think about taking a 'salary', for the reason once you include 'paying salary' then you have to also pay NI contributions which dd another level of complication in terms of both money, registering & paperwork as well as personal income tax on the income

what about ....

if you were could draw up a consultant agreement to have the Ltd Co pay you a consulting fee to reduce the amount of corporate tax payable, then again in your name drawing consulting fees you would be tax on that income personally. Depends also if you have other income as well as the tax band that you fall into.

unless you can minimize, reduce or eliminate the small £5000/yr profits through expenses or other - do the calculation to see the amount of tax that the Ltd company would pay vs what you would pay drawing a consultant fee or a combination of both ... it may or may not be worth it.

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On ‎11‎/‎14‎/‎2019 at 7:57 AM, haf1963 said:

In short you have to pay corporation tax on any profit regardless of what you do with them. obviously you can pay yourself a salary or various other things to minimise the profit. Also you will have to pay tax again if you take out company profit as dividends/salary etc

Its perfectly possible in a small ltd to make no profit for a period as you will have many expenses

Sorry- just want to clarify. When I said profit, I probably shouldn't have used that word. I just mean money made on one particular property, rather than company profits. So if the money made on one property was then used to say- replace a bathroom in another property, would it count as profit from the company perspective?

When you come to work out your tax bill, do you essentially have to look at the income and outcome for each property individually, or can you use the money made on one property to counterbalance a loss on another property, e.g. a renovation project?

 

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On ‎11‎/‎14‎/‎2019 at 8:32 AM, conrad_paton said:

Also milly,

Dont forget companies run in trading years not financial years.

You can change your company's trading year to match the financial year if you like, but they are not the same thing.

Overwise haf1963 is correct.

Conrad

What are the implications of this? I can't see how it makes a difference because I don't have much experience in this area.

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27 minutes ago, millymollymandy678 said:

Sorry- just want to clarify. When I said profit, I probably shouldn't have used that word. I just mean money made on one particular property, rather than company profits. So if the money made on one property was then used to say- replace a bathroom in another property, would it count as profit from the company perspective?

When you come to work out your tax bill, do you essentially have to look at the income and outcome for each property individually, or can you use the money made on one property to counterbalance a loss on another property, e.g. a renovation project?

 

in principle you can use profits from one property income to offset expenses in another but the work you do in the other property has to be legitimate 'expense' and not 'adding value' i.e upgrades etc. So if you are replacing a bathroom/kitchen in another rented out property (due to it being no longer fit for purpose) then thats fine but if you are doing a refurb before renting or doing an upgrade that adds value then it can't be written off against income. It will be part of your capital gains at a later stage

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29 minutes ago, millymollymandy678 said:

What are the implications of this? I can't see how it makes a difference because I don't have much experience in this area.

Hi Milly,

Your company trading year is when and how you work out your returns.

So if you started trading 1st Jan 2020 your trading year will end at the start of 2021.

This will overlap or span 2 financial years. 

Hope this clarifies.

Conrad

Conrad Paton

+44 7957 959851

conradpaton@yahoo.co.uk

https://www.linkedin.com/in/conrad-paton-424446110

 

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28 minutes ago, haf1963 said:

in principle you can use profits from one property income to offset expenses in another but the work you do in the other property has to be legitimate 'expense' and not 'adding value' i.e upgrades etc. So if you are replacing a bathroom/kitchen in another rented out property (due to it being no longer fit for purpose) then thats fine but if you are doing a refurb before renting or doing an upgrade that adds value then it can't be written off against income. It will be part of your capital gains at a later stage

Thanks that's hugely helpful.

On a similar vein, if you release equity from one property does that count as profit? Or could you use all of the money you have released to buy a new property without paying any tax on the released money?

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4 hours ago, millymollymandy678 said:

Thanks that's hugely helpful.

On a similar vein, if you release equity from one property does that count as profit? Or could you use all of the money you have released to buy a new property without paying any tax on the released money?

Releasing equity via. a remortgage is fine and you can do what you like with it inside the company. Releasing equity by selling a property is a different matter as its capital gains so fully tax-able

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