Driven by plans of early retirement or university fees, the most common types of co-ownership are with a spouse, or between family members such as a mother and adult son, or adult siblings. 

Analysis by Provestor shows that 60% of companies formed by spouses are “DIY formations”, where the couple appears not to have received tax or legal advice, and are not taking advantage of tax saving opportunities. 

In this chapter, we'll explain this tax trap in more detail, and how you can avoid it.

Tax trap: not using personal tax allowances

Married couples using a DIY approach to set up a limited company are not always taking advantage of the tax efficiencies of co-ownership 

In the following case study we'll demonstrate how a married couple can optimise their limited company.

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Case study: Mo & Sarah, married investors

Mo has a full time job where he is a 40% taxpayer. His wife, Sarah, is a basic rate taxpayer. They’re starting a company to invest in property to provide a legacy for their growing family and fund their daughter's university fees. There are two  company structures they're considering:  

The company is set up in just Mo’s name. He’s the sole shareholder and has ordinary shares. 

Mo owns the company, Sarah doesn't

Set up and structured so it is optimised for tax. In this company, Mo and Sarah are joint owners and have the optimum share structure. 

Mo & Sarah jointly own the company

By simply using the right company structure, Mo & Sarah will save over £4,800 in tax on £20,000 of profits drawn as a dividend. We'll now explain how.

Worked example: a solely-owned company

When Mo alone owns the company, there’s just the option for one ordinary class of share. Sarah has no rights to voting, payment of profits as dividends or equity from the increasing property value. This restricts how Mo & Sarah can take profit out of the business. 

For example, there is no way for Mo and Sarah to take advantage of the tax allowances that Sarah is entitled to as a basic tax payer. These include using the dividend and income tax thresholds to maximise profit and minimise tax. 

If Mo and Sarah want to take £20,000 out of the company in the form of dividends to contribute to their daughter’s university fees, this will be classed as Mo's income alone. The first £1,000 will be tax free and the remaining £19,000 will be taxable at 33.75 %.

Worked example: a jointly-owned company

Company B’s structure means Mo and Sarah can have different share classes and can maximise their tax position when they take out £20,000 from the company. In this scenario, Mo and Sarah can use Sarah’s dividend allowance and lower tax bracket position to lower the tax payable on the £20,000 dividend. 

In effect, Mo, who is on a higher band threshold, can use his allowance to take out the first £1,000 dividend. Sarah, as a basic rate tax payer, can withdraw a dividend of £19,000 with much more flexibility, taxed only at 8.75% (basic rate band). 

This results in a total tax bill of £1,575, a saving of £4,838. 

Note: the same rules can apply should you wish to include grandparents or adult children in the business. 

Pro tip: investing for your children

It’s worth considering what happens in the future as a young family grows up. A company that's solely owed by Mo would impose further restrictions on handing the business on, Inheritance Tax or taking dividends. It’s therefore advisable to think about this when the company is set up. 

By not establishing co-ownership, should you want to sell or gift shares, sell the company, or if the marriage or family relationship breaks down, the division of the company shares becomes highly problematic.

If you're planning ahead for passing on an inheritance, we highly recommend 

 with our team to discuss this complex topic.

Chapter 2 summary

So to recap, in our experience, many DIY set ups:

Whenever you’re ready, here are 4 ways we can help you start and manage your buy-to-let limited company:

Are you maximising your tax allowances?

Are you making the most of your tax allowances?

Does your share structure fit your strategy?

Are your company documents fit for purpose?

Are you aware of the risks of incorporation?

Are you fully aware of the risks of portfolio incorporation?

Checklist and next steps

Limited company setup checklist and next steps for investors

The ‘DIY' tax trap

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