Dividend Tax Changes – Rent Becomes a Factor from 6 April 2016
Most business owners are now aware that the taxation of dividends is changing from 6 April 2016, and for those that take a significant part of their income from dividends they are likely to be paying 7.5% more tax on their self assessment liability from January 2018 onwards.
If you are a company owner who personally owns the business premises outside of your company, then the option of charging rent (or increasing the existing rent) to your company will become an option to consider from 6 April 2016.
For many years, the choice of rent versus dividend has been neutral in terms of remuneration planning. On the basis that for trading companies, charging a rent could adversely affect an owners eventual claim to Entrepreneurs’ Relief (ER) and a 10% rate of CGT when selling the trading premises, then dividends usually became the better of the two. But from April 2016 we have the dividend regime tax changes, and by 2020 we also have a reduced rate of corporation tax of 18%. Under the same rent v dividend choice there becomes a marginal rate saving in favour of rent from this April.
However, any decision over how and how much to remunerate through salary/dividend/rent/benefits should be very carefully considered. There are many factors (for example is a director affected by the National Minimum Wage, is their total income going to be over the threshold for restricting child benefit etc). The potential loss of Entrepreneurs’ Relief is still a critical factor when taking rent from a trading company. That trade off will depend on the eventual capital gain, the proximity of rent to the market rate, and the number of years’ income tax savings before the anticipated sale.
We can advise you on the most tax efficient remuneration policy, and on the likely impact on Entrepreneurs’ Relief of the decision to take rent or dividends.
Another consideration with holding the business premises outside of your trading company is the impact on Inheritance Tax relief (Business Property Relief). You will get less relief if the property is outside of the company, and no relief at all if you are also a minority shareholder. There is action that you can take to increase your IHT relief to 100% and keep the property safe from trade risk.