Corporation tax: Get your sums right

The introduction of section 24 has seen a sky-rocketing in the number of buy to let limited companies formed. In case you weren’t aware though there are changes coming which are going to affect each and every one. Paul Weller of preferred partner tax experts Astonia Associates gives us an overview

Corporation tax is the tax that a company pays on the profits it generates.

Generally, whilst a corporation tax return has to be submitted within 12 months of the company’s year-end, any corporation tax needs to be paid within nine months and one day of the company year-end.

The current Corporation Tax rate of 19% generally applies to all companies whatever their size.

From April 1st, 2023, the rates are changing and will be replaced by variable rates ranging from 19% to 25%:

• A small profits company rate of 19% will apply to companies whose profits are equal to or less than £50,000

• The main Corporation Tax rate is increased to 25% and will apply to companies with profits in excess of £250,000.

Where companies have profits between £50,000 and £250,000 a new Marginal Relief will apply. Read more here.

Companies will pay tax at the main rate of 25% reduced by marginal relief which acts as a mechanism to adjust the rate of tax paid, gradually increasing the tax liability from 19% to 25%.

There will therefore be an effective 26.5% corporation tax rate for profits between £50,000 and £250,000.

The rates of £50,000 and £250,000 are reduced if a company has associated companies or an accounting period of less than 12 months.

Again generally, a company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:

• One company has control of the other

• Both companies are under the control of the same person or group of persons

STAY STRONG AND CARRY ON

Whilst there is doom and gloom in the media regarding the exodus of landlords from the private rental sector, we have seen the exact opposite with our clients.

Don’t believe everything you read! (Apart from ON THE HOUSE Magazine of course – it’s made by investors for investors after all!)

More purchasing opportunities are becoming available and whilst you have to navigate the mortgage interest position, rents are continuing to increase to help maintain healthy profit margins.

Property investment is for the long term and with the continuing position looking very unlikely to change - demand is outstripping the supply - simple economic rules will dictate the market.

If you are involved in property investment, property development, property management etc then it may be more beneficial for you to operate through a group structure as opposed to operating companies separately.

This can give great opportunities in the areas of moving properties around the group companies without SDLT, opportunities to more easily loan cash around the group and importantly being able to offset profits and losses against the various companies.

This requires very careful planning so bespoke tax advice is required.