Over the last decade, the emergence of the sharing economy has meant that millions of people worldwide are now able to earn supplemental income from personal
assets. Companies like Airbnb have expanded beyond short-term rentals; it is now possible to book local tours, classes, photoshoots, and other bespoke
experiences. While this opens up a world of opportunities, any business should be structured properly to ensure tax efficiency.
Individual or company ownership?
If an individual is already earning via self-employment or PAYE, they may seek to incorporate a new business - particularly if they are in the higher-rate
tax bracket - in order to take advantage of favourable corporation tax rates and tax-planning options. Although there are many more advantages to incorporation,
there are some circumstances where an individual may prefer - or require - to retain ownership of a personal asset, rather than transferring ownership
to a limited company.
Unless the individual has already built up funds in an existing company from a related venture, a newly-formed company will have limited capital, preventing
it from purchasing the asset outright. The transfer can be achieved through crediting a director’s loan account to represent the amount due to the
director. In the case of an existing company, if the director has borrowed money and has not yet repaid it, this can offset the balance owed. In either
case, an individual must raise an invoice to their company listing all items; the sale price must be in keeping with the market value at the time of
With a wide range of possibilities, careful consideration is crucial. This would be especially true for the transfer of specialised or classic/ antique
equipment, where asset values may appreciate over time. If the asset was purchased many years ago and current market value has appreciated beyond the
purchase price, the sale could give rise to a capital gains tax (CGT) liability for the individual. In this scenario, a director’s loan is unfavourable
as the individual has incurred a tax bill but has received no financial compensation for the sale; a transfer of funds should be made, if possible.
Renting assets to the company
An entirely legal alternative would be for the individual to rent their personal asset to their limited company for business use. To ensure the arrangement
is legitimate, the individual should draw up a formal lease agreement with the company, treating the agreement as if they were leasing to another party.
The agreement should detail the monthly cost of the lease, due dates for payment(s), the term of the lease, any requirements relating to insurance,
and arrangements in the event of a missed payment. The rental fee must be reasonable and in line with rental rates for similar assets locally.
The individual would then declare the lease/ rental income via a self-assessment tax return. While retaining the ability to use the asset for personal
use may be required, if it is instead used solely for business purposes this can reduce one’s overall tax liability by allowing the individual taxpayer
to deduct several expense types from their rental profits. This could include insurance, interest, repairs/maintenance and/or general administrative
costs, amongst others.
You may rent many asset types to your limited company; office space, machinery, equipment, vehicles, computers, property, etc. Certain assets may require
special treatment, so you should always consult with a professional to ensure your arrangements are legitimate.