As you’ll know, the corporate structure of a limited company will allow you to maximise the amount of profit left for your investment. But you’ll need to think carefully about how to efficiently extract the money out of it.
Once you’ve got your property in place and you’ve started renting it out, you’ll (hopefully!) start to accumulate cash in your company account from rental income. You may also get cash if you choose to sell all or part of your property. This cash can either sit in your company account, or you might choose to reinvest it.
But there might also be instances where you might like to withdraw cash from your company. This is the point where many investors can potentially make costly mistakes. As an example, plenty of investors assume that paying themselves from the company is the best way to get money out of your company, but this is not always the best case.
There are actually three other ways that could potentially be much more efficient for you to move money out of your company:
Dividends are essentially payments made from company profits to shareholders in the company. Dividend payments are made by instructing your company to transfer profits from the company account to your personal account, and can be done as regularly as you like (so long as your company has distributable reserves!)
This type of payment can be an efficient way to get the money out of your account if you are a UK resident, as you receive a dividend tax-free allowance on the first £2000 regardless of how much income you make. If you aren’t a UK resident, these payments can also be efficient as dividends paid by UK companies are not subject to UK withholding tax.
Although the concept behind dividend payments is simple, the mechanics of making a dividend payment can be complex. In order to make the transfer, you must hold a board meeting, review the position in the accounts to confirm that there is enough money available, and then declare the dividend to be paid.
Director / Owner Loan Payments
Another way to get money out of your company and into your personal account is to do so through Director or Owner Loan repayments.
A Director or Owner loan is a legal agreement between the company and the investor that essentially lays out that you (as the investor) are lending money to the company to purchase the property. Therefore, the company will owe you that money back.
The company will then need to repay its loan back to you over time. When your legal documents are structured correctly, the debt holder (i.e. you as the investor) can asked to be paid at any time. This is an efficient way to do this as the repayment of debt is not subject to income tax.
One of the most efficient, yet least common ways of extracting profits from Buy-To-Let companies is through pension payments.
As the director of your company, you can make pension contributions from the company directly to your pension pots. These pension payments will then be treated as an expense and as such, are deductible from your gross income. This then results in lower reported profits when it comes to paying corporation tax.
However, if you choose to opt for this strategy, it is important to bear in mind that you will typically not be able to access your pension pot until you are 55.
As you think about the best way to extract money from your company, it’s important to consider which method makes the most sense for your personal circumstances whilst also being efficient. Companies incorporated with GetGround are designed to support these different ways of extracting cash from the company and can help you draft out the legal documents needed in order to make this happen.