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Should I incorporate my property portfolio?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

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This is an idea which seems to be ubiquitous at the moment. At ETC, we have been talking to clients about incorporating their property portfolios for many years. However, one needs to think long and hard about the Client’s objectives.

Assuming one can demonstrate there is a business (but note no requirement to be a trade) one can usually incorporate in a tax neutral fashion. One does need to be careful about Stamp Duty Land Tax (SDLT) so it is convenient if the property business is being operated via a partnership or LLP prior to the incorporation.

But what is causing this sudden epiphany? Essentially, it is the restriction that will be placed, a few years hence, on obtaining tax relief on the payment of interest on mortgages for individuals taken out to purchase buy-to-let properties. The rules do not apply to either commercial properties or any properties owned by, say, a Company.

A summary of the pros and cons of operating a property portfolio are as follows:

The Pros

  • Corporation tax of 20% – moving to 18% in the next few years;
  • Interest may be offset against the taxable profit (albeit the value of the relief is 20%, decreasing to 18%);
  • No further tax to pay where the net profits are being reinvested;
  • Should be tax neutral assuming there is a genuine property business – which is not high hurdle.

The Cons

  • If one is personally expending a chunk of the net profit on one’s lifestyle then the tax charge on personal extraction (dividend / bonus / other) may mean there is little tax benefit of an incorporation;
  • Might be required to re-engage with lender regarding any existing loans which could mean they are revised unfavourably (in some cases it might be possible to avoid such conversations);
  • If there is no property business then a tax charge may apply;
  • Need to bottom off the SDLT position – although this is usually possible;
  • This does nothing to address a potentially significant IHT issue (See below).

As you will see, there is no ‘right’ or ‘wrong’ answer. Whether to incorporate a portfolio should be, like all tax advice, determined on a case-by-case basis with the client. Despite the message in the market, it is certainly not a “no-brainer!”

If you have clients with property portfolios who you want to help then please contact us for a discussion.

2 Comments:

  • I’m not so sure that it is that easy in establishing that the property portfolio is a business – this is for the purpose of CGT incorporation relief.

    The Ramsay case did result in victory for the taxpayer. She was taking an active role in managing her property – however, reading the case itself the impression is given that a different judge might have come to a different conclusion.

    Here is the case: http://www.bailii.org/uk/cases/UKUT/TCC/2013/226.html

    Of course there was only one property in that case. If someone owns ten properties and he’s not sitting idle and just leaving everything in the hands of his agents, perhaps it would be easier to show that the portfolio is a business as required.

    • Andy Wood

      Hi Satwaki, thanks for your feedback. I think I agree with what you’re saying – it is not a foregone conclusion that a portfolio will qualify by any means. As I recall, I would not have come to the same conclusion as the UTT (think it was on appeal?) in Ramsay and would suggest that is an outlier.

      However, establishing a ‘business’ is much easier than, say, establishing a trade. Ultimately, our view is make sure you sit down and get proper advice rather than blindly following the hoardes down the incorporation route.

      Cheers
      Andy

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