As professional accountants, some of the questions we’re most frequently asked by limited company owners are about tax relief. It’s often a delicate balancing act between the benefits for the company and the individual. What may surprise you is that there is one particular legal ‘loophole’ that is beneficial to both.
As a director, you can rent personal assets to your limited company, including property, machinery, IT equipment and vehicles. By doing so, you can benefit from tax efficiencies as both an individual taxpayer and as a company.
This blog article will take a look at what kinds of assets are eligible and how an asset rental arrangement affects personal and company tax liability.
Why rent personal assets to your limited company?
Equipment like laptops and phones are a significant investment, and buying them outright through your company may not be possible, especially in the early days.
Renting office space, vehicles, and equipment is a more affordable option – so why not rent them from yourself instead of giving money away to a leasing company?
In most cases, your rental profit will be exempt from employee National Insurance payments, and it will also result in significant Corporation Tax and NIC savings for your business.
How do you rent assets to your limited company?
First, you have to determine the rental amount based on the market value. It’s important to be reasonable in your estimate of the market value!
Take into account the asset’s age and condition and how much a comparable asset is to rent in your local area. If HMRC deems the rental amount to be excessive or insufficient, it may be challenged.
You will then need to put a robust agreement in place, including the monthly cost, due dates, insurance cover details and general terms and conditions.
It is crucial to maintain proper records, including rental profits, expenses, bank statements, and supporting evidence of market rates. These records help demonstrate the legitimacy of the rental arrangement to avoid any issues with HMRC.
What are the benefits of renting out personal assets?
Benefits for the individual:
Renting assets can be a more valuable way to extract money from your limited company when compared to taking a salary, as the income earned is exempt from NI (however, you will have to pay income tax on it).
Let’s look at a simplified example of a £50k salary versus £50k rental income made from leasing office space owned by you to your company:
Taken as a salary, you would pay £7,486 income tax and £4,491.60 employees NICs (rates based on 2023/24). As rental income, you wouldn’t pay NI, presenting you with a significant saving – not to forget, you are saving money on renting office space!
This is a simplified example, not taking into account any other benefits or bonuses that you may receive as a director. However, the potential savings are clear.
Tax implications for the company:
When it comes to the company’s tax liability, on a £50k salary, the company pays tax in the form of employer’s NICs at a cost of £5,644.20 (based on 2023/24 tax rates).
If taken as rental income instead, that is a £5,644.20 saving to the company.
What’s more, the rental costs will be deductible from your company’s profits, reducing its Corporation Tax bill – another valuable tax relief!
What are the tax implications if you rent assets to your business?
When personal assets are rented out to a company, there are different tax cases that will arise, lets take a look here:
Any assets you rent to your business are a tax-deductible expense, which lowers your company’s Corporation Tax liability.
So if you are renting property to your company for office space at £25k per year, that’s £25k that won’t be subject to Corporation Tax!
You must pay income tax on the rental profits you receive from the asset and declare it on your annual self-assessment tax return.
However, you may be able to deduct allowable expenses such as repairs, maintenance costs and insurance.
On most assets, like property, you will not be charged National Insurance on rental profits.
However, it’s important to note that if you meet the criteria for being considered self-employed for the rental activity (e.g., renting out multiple properties as a business), Class 2 NICs may be applicable.
Capital Gains Tax
When you come to sell an asset that you have been renting to your business, if you have been charging rent at the market value, then you are subject to Capital Gains Tax (10% for a basic tax rate payer and 20% for a higher-rate taxpayer based on 2023/24 tax rates).
However, if you have been renting the asset to the company under the market value, you are eligible for Business Asset Disposal Relief on the proportion of rent under the market value.
Business Asset Disposal Relief
When selling your business or a portion of it, you may be eligible for Business Asset Disposal Relief (BADR), which reduces your capital gains liability to 10% (up to a £1 million sale threshold).
However, if you intend to sell an asset that you are currently renting to your company as part of the transfer of company ownership, the amount of BADR you can claim on that asset may be limited based on the percentage of market rent paid by the company to the director.
So before renting assets to your company, it is important to consider whether you plan to sell the asset along with the transfer of company ownership, as it could potentially increase the sale value and allow you to benefit from a higher amount of BADR.
You should also weigh the decision against whether you wish to keep receiving rental profits from the asset. To make an informed choice, factors such as the asset’s value, potential increase in the sale value, and ongoing rental income should be carefully considered.
Contact us today for a FREE tax review.
Is transferring ownership of my assets to my company a better option?
When transferring personal assets to your business, it’s important to consider the associated costs to facilitate the transfer, e.g. valuation fees.
Transferring property ownership to your company incurs significant costs in the form of Stamp Duty Land Tax.
Renting assets to your business as a source of income can be a far more tax-efficient way of extracting money from your company than salary and/or dividends.
For the individual, rental profits are typically exempt from NI. As a result of lowering your salary, your company’s NICs will also be reduced. What’s more, the rent is a deductible expense, lowering its Corporation Tax bill.
A word of caution – you must consider how you plan to dispose of the asset, as it affects the rate of Business Asset Disposal Relief you will receive if you come to sell your business.
It’s important to remember that whether renting assets to your company is best from a tax efficiency point of view depends on your individual circumstances. It is always best to contact an accountant or tax specialist to help you make an informed choice.