By now, you’ll be well aware that Box 3 is no longer the “fun box” it once was. The solution is to transfer your assets from Box 3 to another box: ‘box hopping’. People often ‘hop’ to Box 2 by transferring the assets into a private limited company (or, where applicable, an open-ended fund for joint account). However, if you run a sole trader business (or, as an entrepreneur, are a partner in a general partnership or professional partnership), you can place your assets within your business (Box 1).
Entrepreneurial spirit
For income tax purposes, an entrepreneur may have three types of assets:
- required business capital;
- ability to make choices;
- mandatory personal assets.
Only the first two types ensure that your capital is taxed in box 1 (as business profits) rather than in box 3. Within your business, the actual return on your capital is taxed. You may deduct the SME profit exemption from the profit. This deduction amounts to 14% of the profit. If your business makes a loss, the SME profit exemption results in an additional tax liability of 14%.
Non-operational
A case is coming before the North Holland District Court case A case involving a lady who runs a sole trader business. She lends a sum of money from her sole trader business to a private limited company. The Tax and Customs Administration regards the lending of the money as a non-business activity, and the District Court agrees with this view. As a result, the income from the loan does not form part of the business profit (Box 1), but is taxed under Box 3. Consequently, any impairment of the loan is not charged against the profit.
The court considers that, in this case, the granting of loans does not form part of the sole trader’s normal business activities. Furthermore, the activities of the private limited company are unrelated to those of the sole trader. Nor is this a case of investing funds that are temporarily surplus to requirements within the sole trader’s business.
Box hopping
It looks as though your income from savings and investments (Box 3) will continue to be assessed on a flat-rate basis for a few more years. We regard the announcement of new studies into changes to the tax system as a sign that the intention, expressed during the formation of the government, to move towards a tax base more closely aligned with actual returns will not be put into practice in the short term. It therefore remains worthwhile to consider whether assets in Box 3, where the actual return is low, can be transferred to another box.