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Responsibilities of a company director

Many people reading this will no doubt already be company directors, while a few may be thinking about establishing a company and becoming its director.

The beginning point for any company’s director, and consequently the starting point for any company’s director, is to learn a little bit more in detail about the roles and duties of the directors.

Although a company is owned by its shareholders, they entrust the administration of the company to the directors (even though in most cases, the shareholders and the directors are the same people). Clear and reasonable duties for the directors are essential both to safeguard the interests of the subscribers as well as the directors themselves. Consequently, the directors understand what is required of them, what they are to do and what not to do. Should the directors fail in their duties, the consequences could be serious.

 General duties that apply to all directors as laid out by the companies’ act 2006:

  • A responsibility to function within their powers, as laid out in the company’s Articles of Association, memo and as well as other sources
  • A responsibility to improve the company’s success.
  • A responsibility to apply independent judgements
  • A responsibility to apply realistic diligence, skill and care
  • A responsibility to circumvent clash of interests
  • A responsibility to reject benefits from any third party
  • A responsibility to unveil interests in a planned arrangement or transaction

Even though it has no advantaged status in law, the obligation to promote the company’s success lies at the heart of a director’s responsibilities. Other responsibilities of directors, whether it is specified in UK legislation or not, can be seen as following on from that. In increasing the company’s success for the benefit of its shareholders as a whole, the Companies Act states that directors need to think about the effect of decisions on the reputation of the company and the interests of other subscribers including workers, shareholders, clients, suppliers, as well as the community at large.

Generally, the directors may apply all the powers of the company. However, the company’s Articles of Association may set limitations on the powers of the directors in some areas– a common instance includes limitation on new shares allocation in the company among others. Thus, it is typical of the directors to offer new shares to the current shareholders prior to inviting applications more widely.

Additionally, the articles will define how decisions should be made. Although limited company directors will, as a board, jointly bind the company, the articles generally give power to the board of directors to entrust powers to each director as they deem fit.  The specific role of each director within a company may vary based on the company size, the number of directors, and the nature of the company’s business. The role, expertise and experience of a director will likewise have an impact on their areas and influence their areas of responsibility and coverage.

Property Companies – Are they back in fashion?

Property tax

There was a time when a limited company was considered the best way to hold rented properties; then the times (and the tax rates) changed and holding investment properties in a company became less attractive.

With rates of corporation tax plummeting over the last few years, and set to reach 20% for all companies in a couple of years, it may be the time to reconsider the use of a property company.

In particular, if part of your strategy involves selling properties to realise the capital gains they have made (and property prices seem at last to be rising again!), bear in mind that the company will pay only 20% on its capital gains, whereas you (if you are a higher rate taxpayer) will pay 28%.

When considering whether to use a company to hold your properties, much depends on the size of your planned portfolio, and how much cash you want to extract from it. If the plan is to reinvest the rental profits and acquire more properties, then the company will only pay 20% tax on its profits, whereas you could be paying 40% or even 45%.

If you want to draw out the profits for your own use, however, a company will not save you significant sums in tax, because when you draw out the profits as dividends (the most tax-efficient way to do this) the effective rate of tax for a 40% taxpayer is 25% on the dividend paid, and when you bear in mind that dividends are not tax deductible for the company, it works like this:

Example – The cost of drawing company profits

Derek is a 40% taxpayer. His property company makes a profit of £30,000, and he wants to pay this out as a dividend.  He can only pay a maximum of £24,000, because the other £6,000 is needed to pay corporation tax. On his £24,000, he will pay income tax of £6,000, so the total tax paid by him and the company is £12,000, or 40% of the profits – exactly the same tax he would have paid if he owned the properties directly.

If Derek leaves the profits in the company to invest in more properties, however, he will have £6,000 more to invest than he would have if he owned the properties directly.

Timing

A company can decide when to pay dividends, so to some extent this enables you to control the rate of tax you pay on your dividends. If you own properties directly, you are taxed on the profit as it arises and apart from the timing of expenses like repairs, there is little you can do to change this.

Things a company cannot do

It is also worth bearing in mind that there are certain strategies that only work in the case of properties you own personally rather than through a company:

•           Equity release – as a property owner, you can remortgage a property and use the cash for your own purposes, provided the mortgage is no greater than the market value of the property when it was first let. A company can, of course, remortgage its properties in the same way, but to extract the cash you will need to receive a (taxable) dividend.

•           Main Residence – the exemption from CGT on your “only or main residence” does not apply if the property is owned by a company – indeed, there is likely to be a tax charge on you for the benefit of being allowed to occupy the property!

Here's a Practical Tip from Cloud Accounting NI :

Whether a company will be the best way to own your property portfolio depends very much on what your business strategy is. As with most tax matters, there is no “one size fits all” answer to the question, but it is a question every property investor should be asking themselves.

CLOUD ACCOUNTING LLP

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