Businesses and sole traders aren't the only ones who can benefit from accountancy services. Individuals and couples who own property investments, for example, also have accounting and taxation responsibilities for their rental income, which can sometimes become complicated. This case study describes how we helped a couple consolidate their incomes from property rentals and consultancy into a Limited Liability Partnership and Limited Company, streamlining their tax responsibilities and giving them greater visibility over their income.

The challenge

Our client is a husband and wife couple who, together, own a portfolio of nine properties and operate a consulting business. The challenge they faced was that the properties and the rental income were under her name, and his consultancy business was conducted under the aegis of three limited companies. This created a complex accounting situation in which not much of the rental income was on his self-assessment tax return, and where accounting deadlines were being missed – leading to fines and late penalties from HMRC.

It’s fair to say that the couple’s accountancy situation was a mess when they came to talk to us. The client was highly frustrated and was finding it difficult to see the light at the end of the tunnel.

Our solution

Our first priority in creating a solution for this client was to help them through their backdated accounts and tax returns. With this urgent requirement out of the way, we then set about consolidating the clients limited companies and property portfolio into a more manageable business framework.

The main concern of the client was that consolidating the businesses would result in the trading history and accounting records becoming lost. We worked with them step-by-step to resolve each problem and propose solutions to current issues and to lay the ground work for a strong trading and reporting structure going forward.

The steps we took

First, we bought the client’s tax returns and accounts up-to-date, which was less complicated than they had feared. Unfortunately, the client’s previous accountant had not had the resources to work through the data and then got behind. The client actually ended up getting a tax refund on their personal tax returns rather than being chased by HMRC.

When they first spoke to us, the husband of the couple had three limited companies. One of these was very small, and owned some shares in another company, through which the client received dividends. The gain was small enough that the company could sell the shares back to the other business concerned, which allowed us to close the limited company. This saved a set of accountancy fees and reporting obligations for the limited company, and it means that when he sold the shares personally, he was able to use his capital gains allowance for that year.

The client’s relationship with their previous accountant was very much a traditional one. At year-end, the client would provide the accountant with a folder of paper receipts and bank accounts, which were then keyed in manually to bring the bookkeeping up-to-date. This labour-intensive approach to accountancy is expensive, and also makes it difficult for clients to keep track of their income, outgoings, and profitability from year to year. As an alternative, we helped the client implement Xero cloud-based accounts. Bookkeeping is still completed annually, but the bank statements are imported into Xero, and we have various bank rules in place to complete the bookkeeping and can go back to the client with any queries. This saves considerable bookkeeping time and expense, and has reduced their accountancy fees.

Migrating the client’s accounts and bookkeeping to Xero has allowed us to set up tracking codes for individual properties. This has helped the client to better manage the property management side of their business, by showing which property is making money, and which properties are not doing so well. As a result, the client has sold two properties which were not doing as well as they thought, and optimised the rents on other properties.

Finally, as the wife held the property portfolio personally in her name, it meant that she was paying excess tax, as the government changed the rules for allowance of mortgage interest. Through the assistance of one of our associates, we provided the client with additional advice to incorporate the properties into a Limited Company. The properties have been moved from individual ownership to an LLP, and will then be moved into a limited company later in the year. This will prevent the client from having to pay stamp duty and capital gains costs. Once inside the limited company, the mortgage interest will be a fully allowable business expense, and it will allow the client to invest any additional cash from the business into purchasing future properties.

Outcomes

Following our help rationalising the client’s assets and business interests, they now face fewer overheads from accountancy, lower taxes, and greater visibility, as well as the ability to accumulate capital to grow their property portfolio in the future.

With fewer and less complicated accounting obligations, tax returns are no longer late, and the client is no longer receiving fines or interest from HMRC. Data is also more accurate, giving the client a more objective basis on which to make business decisions – e.g. selling properties or increasing rents.

Find out more

There isn’t a one-size-fits-all solution for tax advice. As investors and business owners have different lifestyles and financial commitments, tax advice has to be correct for the individual concerned. In the same way, as we managed to help this client put their assets and business interests on a firmer footing, we can also provide bespoke support and help you address any issues that you are facing.

To find out more, please contact David Howard today by calling 01403 337246.

Image Source: Canva