Many property investors have a 'day job' limited company - whether a contractor/consultant company, or a more traditional business - which has excess cash that can't be extracted without incurring at least a 25% tax charge. This article looks at how such funds can be used for property investing, without incurring a tax charge.

The scenario
An investor operates a trading company, either a contractor-type company, or a traditional trading business. The business would typically pay the owner a small (c£10k) salary, and a tax-free dividend, totalling c£42k - this is the standard remuneration set-up for a company director-shareholder, as up to this level of extracted profits, there is no personal income tax or National insurance to pay. If there is a spouse/partner, the above c£42k profit extraction figure can be doubled. (Is that assuming the spouse is not working?)

The problem
Any dividends taken out of the trading company in excess of the levels above are taxed at 25% of the amount taken, meaning that the combination of company and personal tax paid is exactly 40% (after the dividend tax credit) - paying tax at 40% is of course highly unattractive and significantly reduces the benefits of having a company at all.

Therefore, for companies making significantly more profits than can be paid out by the usual c£42k per person small salary/dividend approach, there is the problem of having excess cash 'trapped' within the company that can't be extracted tax efficiently for personal use (albeit, this is a nice problem to have!).