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This is something that we have been involved with for many, many years. However, various tax changes over the last couple of years and the prospect of increased Corporation Tax rates have made this become particularly germane of late, but whereas incorporating property portfolios was the ‘in-thing’ many years ago, is it still the right thing to do?
The economic landscape for property investors has shifted significantly over the last five years – the introduction of higher rates of SDLT for additional residential property and withdrawal of mortgage interest relief has had a notable impact on property investors.
Investors who have grown a portfolio held in their own names are now looking to invest and manage the portfolio through a company. Why? Well, companies offer several advantages over personally owned portfolios including:
Once again, tax legislation does not favour the buy-to-let investor. For most entrepreneurs, moving from personal ownership to a corporate comes with a host of tax reliefs to remove the barriers from the natural progression of a business.
For buy-to-let landlords, they are instead faced with potentially significant tax barriers including capital gains tax and stamp duty land tax.
For both taxes, incorporation the transfer is treated as taking place at market value. This can crystallise significant tax charges:
More often than not, these charges will act as a barrier to incorporating.
Ultimately, that depends on each individual case and each individual’s specific objectives! However, one common strategy is to take advantage of certain reliefs which may apply to mitigate the potential capital gains tax and stamp duty land tax liability.
Where the portfolio constitutes a business then incorporation relief may apply to mitigate any capital gains tax liability. This relief was not generally thought to apply to landlords, but this was clarified in the case of Ramsay.
There are two key reliefs which may apply to minimise the stamp duty land tax liability – multiple dwellings relief and the ‘six pack’ rule. However, this will typically still crystallise a material stamp duty land tax liability – at ETC Tax we have innovated to help investors manage this liability without any immediate cashflow disadvantage and recovering the upfront cost over the longer-term.
Special rules can apply to certain partnerships which mean that the stamp duty land tax liability is mitigated all together. However, these rules are complicated and do not apply in all circumstances.
An incorporation should not create any IHT problems. However, one should bear in mind that the shares in the property investment company will not qualify for Business Property Relief (BPR). Some relatively simple steps could be taken to take the value of the shares outside of UK IHT.
Whilst many investors will benefit from operating via company – especially where the intention is to reinvest the profits and grow the business, this will not necessarily be appropriate in all circumstances and it is critical that any restructuring takes account of your clients objectives and to ensure that you don’t end up making their tax position worse. Some examples of where incorporating might not meet their objectives could include:
Ultimately, this is down to the specific terms and conditions of the mortgages. However, we would typically recommend that lenders are notified and kept in the loop – our experience is that lenders generally take a favourable view of company structures and offer similar, if not better, interest rates via a company.
The 15% super charge applies to ‘non-natural persons’, such as Companies, acquiring residential property to be used as a residence (ie it is not let). As such, where there is an underlying commercial activity (such as letting), then it should be possible to claim a relief.
This applies an annual tax based on the value of a property owned by a company. However, again, this is designed to discourage the ownership of private residences and would not apply where the property is let.
Ultimately, an informed decision will need to be made based on the advantages and disadvantages of each individual case.
An incorporation should not create any IHT problems. However, one should bear in mind that the shares in the property investment company will not qualify for Business Property Relief (BPR). Careful planning at the early stages of an incorporation can still mean that effective IHT planning can be implemented.
We are experienced in advising property investors, developers and entrepreneurs on structuring their businesses both from a commercial and tax perspective.
We can review your clients position and give an overview of the options for them to consider which situation is best for them and their intentions. Get in touch.
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