Tax Q & A’s – Debbie’s monthly editorial for Grapevine readers

Every month Debbie Story answers your questions in the local Grapevine magazine.

What are the advantages of trading as a limited company?

This is an important question to ask.  A few of the advantages are:

  • If a limited company should fail there is less risk to personal and family assets than there is with sole traders or partnerships.
  • Shareholder Directors can select a package of Low Salary and Higher Dividends aimed at reducing Tax and National Insurance both for the individual and the company.
  • Shareholdings can be split between family members to spread the dividends and reduce higher rate tax liability (or eliminate it all together).
  • Extraction of profits from the business can be timed to reduce or avoid higher rate tax liability.
  • Limited Companies can be easier to sell than Sole Traders or Partnerships.

Everyone’s circumstances are different, so please speak to your accountant or have a free initial meeting with myself.

Do children pay tax?

Children are entitled to full personal allowance (£8,105 from 5 April 2012) and lower rate tax band (£34,370 from 5 April 2012). The income of your children is theirs in their own right, no matter how young they are. There are certain exceptions where income comes directly, or indirectly from you, which may still be treated as your income.  For example, a minor who is a shareholder in your company.

I have bought and property and letting it out.  I’m making a loss as the mortgage payments are greater than any income.  Do I need to fill in a tax return?

One error I often see is the assumption that all of the mortgage payment is set off against the income from a buy-to-let.  This is only true of an interest only mortgage.  Any capital element of a payment is not tax deductible when working out the profit or loss.  If it is still a loss, then a tax return does not need to be completed as long as the rental income (before deducting allowable expenses) is less than £10,000.  If a profit will be made in the future you will want to uses these losses, so make a note of them and keep your records.

I am in the process of selling all the shares in my Company.  The purchasers are insisting that I enter into a consultancy agreement whereby I will be required to continue working for the company.  Will this agreement prejudice a claim for Entrepreneur Relief?

It doesn’t matter that you will still be engaged by the company (but check whether or not you are an employee or a self-employed consultant). The qualifying conditions for ER include there being a material disposal of business assets. The sale of shares is such a disposal. Obviously you also need to be confident that you meet other qualifying conditions such as 12 months ownership/employment, personal company (5% rule) and trading company.