Self employed – saving money for acquisition?

Hi all

I run a business (a partnership) so we are taxed based on annual profits. I am planning on buying a property (we currently lease) but of course I will need a large deposit (I have been advised around 25% of sale price is expected as a minimum on business mortgages).

However, if I save the money I get taxed on it at year end – how do I get around this? Is there some way of putting money into a fund that is tax free? It seems daft that around 30% of all savings will be taxed and it will just make it harder for us to save for the property!

Thanks…

Surely, it’s only the interest that gets taxed?

I think you need to talk to an accountant.

If it’s booked as profits then it’s taxable but I expect there’s a way round it 😉

Your only taxed on it once though which you would be regardless of if you left it in the business.

You don’t get taxed on it again next year just because you have retained it.

When you come to buy the property if the deposit is tax deductible (don’t know how that works) You will get the relief then.

Look at a SSAS pension. You can use the pension fund to invest in property.

http://en.wikipedia.org/wiki/Small_Self_Administered_Scheme

From my very limited understanding they are only worth doing if you have over £30k in your pension fund. But you can transfer from a SIPP to a SASS, so set up a SIPP, pay into it (pension is tax deductable) once you have enough in the fund convert to SASS, use SASS to buy property. Pay rent (also tax deductable) from business into SASS, retire and spend your hard earned cash.

Only taxed on the interest which lets face it is minimal. As Gearfreak states it can be become part of your pension pot. If you went limited you could charge the company for it’s use adding more to your pension.
Many other possibilities too. Are you opting to charge VAT on the property? if so you may be better getting a smaller loan and a bridging loan.

Surely, it’s only the interest that gets taxed?

Well no, if (say) I earned £50k in a financial year and took £25k as drawings and saved the other £25k, then I still get taxed on £50k.

And yes I will get proper advice – just thought I would ask here to start getting an understanding of what is available – thanks for the help so far…

You are getting taxed on your earnings as self employed because you are the business. Anything you don’t take from the company is irrelevant as it’s yours anyway be it in the business bank account or your private account.
The only way to avoid this is to go limited though the company would be taxed on it’s profits still but at a lower rate. You could then pay yourself more tax efficiently too.

then I still get taxed on £50k.

Well of course – you get taxed on your profits. I don’t see anything wrong with this tbh. Painful having to write a cheque for it I know but that’s life. 🙂

What you need to do is run your business more tax efficiently then. As craigxxl says, can you turn it into a limited co. rather than a partnership with you and your business partner as directors? Pay yourselves the TFA as salary, then the rest as dividends which are taxed at a lower rate than income tax.

Ask your accountant.

Dividends aren’t taxed as the company has already paid corporation tax on the profit.

I have considered going Ltd, but most years profits made make the difference negligible. Still don’t understand why I should be taxed on money the business has made but I haven’t drawn. If I made £200k and bought an Aston I would be charged no tax, but if I save to be able to invest back in the business I get taxed. Barmy.

Hammyuk, you need to speak to an accountant.

Johndoh, you are the business. It’s not a separate entity like a limited company that can be sold on. The earnings of your business as a sole trader can’t be separated from you so you are taxed on the full profits.

I know but it dies seem daft – I get taxed if I want to save up a nest egg to invest back into the business. Instead I have to spend it on stuff I don’t really need or pay 30% or more in taxes.

I know but it dies seem daft – I get taxed if I want to save up a nest egg to invest back into the business. Instead I have to spend it on stuff I don’t really need or pay 30% or more in taxes.

You need to give this kind of thing a lot more thought if you’re going to do this for a living 🙂 Getting taxed 30% on ‘x’ amount means to get to keep 70% of ‘x’ and do what you like with it. Spending 100% of ‘x’ on stuff you don’t really want means you get to keep 0% of ‘x’ but have a big pile of stuff you don’t want to look at.

So I can make money and as long as I don’t do anything with it like go and spend it or owt, I get to keep it all? Yay! Woop! 😀

Well yes. If I ‘draw’ the money for myself I get taxed on it. If I want the ‘business’ to keep it for a rainy day or whatever I don’t see why I should be taxed just because I didn’t spend it before March 31.

Well yes. If I ‘draw’ the money for myself I get taxed on it. If I want the ‘business’ to keep it for a rainy day or whatever I don’t see why I should be taxed just because I didn’t spend it before March 31.

Businesses get taxed on profit. As you’ve spotted you need to avoid making a profit.

Have a chat with your accountant. There are all kinds of ways of doing things.

If I want the ‘business’ to keep it for a rainy day or whatever I don’t see why I should be taxed just because I didn’t spend it before March 31.

Because the ‘business’ has earned the money, so the ‘business’ gets taxed on it. If you want more loopholes, and ways to move money you need to go limited… and see an accountant!

You should be a limited company, based on what it sounds like you want to do.

Do you not have an accountant you can talk to about it?

Yes we have considered Ltd, but in 9 years of trading only a couple of years have been good enough to make the change really worthwhile (based on my accountants calculations anyway).

Perhaps I need to just buy lots of shiny new Macs…

You could also set up a parallel partnership with the same membership, to own the property or other large asset. The original business could then pay to rent or use the asset. That way the original partnership is paying a bill not drawing profit. Fairly common in legal firms, which are traditionally partnerships (more LLP these days).

If you use profits to purchase a property, you’ll still be taxed as you’ve purchased an asset. The same goes for capital equipment, you can’t use such purchases as costs to cancel out your profile, although they can be depreciated.

If you use profits to purchase a property, you’ll still be taxed as you’ve purchased an asset.

Okay, fair enough.

But If I save for three years, I get taxed on the savings I made in years one and two as well as being taxed again when I use that saved (and taxed) money to buy the asset.

If that is what your accountant is telling you then you need to find a better one.
You get taxed on your earnings in the year the profits were made. Any profits that you have earned and not spent will attract some interest and you get taxed on that interest at source by the bank. This repeats for additional years, taxed on profits and interest on the accumulated savings.
When you buy the asset you aren’t taxed again but can claim capital allowances which lowers your taxable profits decreasing the amount of tax to be paid.
On buildings you can’t claim capital allowances on the building it self but can on the fixtures and fittings as well as the plumbing, heating, electrics and on other such parts of the integral fixtures but at a lower rate. It’s important to get the building surveyed correctly with the values of each aspect of the building detailed to make the most of your capital allowances.

If that is what your accountant is telling you then you need to find a better one.
You get taxed on your earnings in the year the profits were made. Any profits that you have earned and not spent will attract some interest and you get taxed on that interest at source by the bank. This repeats for additional years, taxed on profits and interest on the accumulated savings.

I do not believe that is the case at all – remember I trade as a partnership. And my accounting software calculates the tax in the same way as my Accountant advises it should be paid.

I would love you to be correct though as I would be owed quite a sum back in tax paid!

No difference other than you only get a portion of the profits not the full amount. If you are on a fixed share then you are taxed through PAYE as an employee as you don’t have the same risk.

You have earned a profit, you pay tax on profit.

You save for 3 years, you pay tax on 3 years profit.

You invest 3 years savings in a property and then claim for capital allowances on the properties purchase price reducing taxable profit for that year or however many years you choose to depreciate the asset by (not sure how that works in case of a deposit on property)

It adds up to be exactly the same, you just have to wait until you have all of the money in place.

Your analogy of purchasing the aston is no different to if you could purchase the property in one year or if you saved for the aston over 3 years.

Mathematically it is exactly the same.