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  • Tax

    Buy to let - Partnership

    Hi,

    My accountant has advised to form a partnership between me & my wife to manage our Buy to lets income. We currently jointly own the properties. The reasons are:

    1. After 3 years, we can move the properties over to a Ltd company & not pay SDLT tax.

    2. In a partnership, we can have different ratio of income division instead of 50-50 which can help in tax planning.

    Do banks/underwriters see the partnership to manage rental income as an issue when it comes to remortgage existing properties or adding more to the portfolio?

    Any reasons to not make a partnership?

    Thanks

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    Why, in our option, incorporation is the worst and most expensive mistake landlords will ever make.

    Overview

    Since the introduction of the 3% Stamp Duty (SDLT) uplift and George Osborne’s now infamous S24 landlord tax and everything that went with it, such as the removal of the wear & tear allowance, and the additional 10% Capital Gains Tax (CGT) surcharge for ‘investment’ assets, landlords are being told that the only answer is to incorporate, i.e. move their property portfolio into a limited company.

    And, as limited companies can deduct 100% of their finance costs and the like, that would be the obvious thing to do.  The trouble is that what landlords are not being told is that incorporation is a one-way street and will be the most expensive ‘business’ decision/mistake they ever make.

    Here’s why.  Apart from the transactional costs (re-mortgaging, professional fees, etc.) and the significantly higher tax regime that you’ll eventually find yourself in, you’ll have to qualify for what is known as S162 Incorporation Relief.  In basic terms, that means the transfer of ownership of all your ‘investment’ properties at the same time from being in your name, to that of your limited company without having to pay CGT or SDLT in the process.  By the way, you can’t transfer properties one at time, incorporation and S162 is an all or nothing one-way street.

    Pretty much up until the end of 2017 HMRC was happy to give non-statutory clearance for S162 applications, meaning that you had the certainty that there wouldn’t be a massive and wholly unexpected tax bill upon completion.  Sadly, that’s no longer the case, which means that you won’t know whether you have a tax bill or how much it’s likely to be until it’s too late to stop.  BTW, there’s no way back once you incorporate and, as you’ll see later, the tax position gets progressively worse.

    By the way, when it comes to mortgages, upon incorporation you go from being a private individual with a whole raft of consumer legislation to protect you, to becoming a commercial borrower whom the law expects to be able to look out for themselves; which if you’ve ever entered into a non-regulated finance agreement you’ll know is a very different world.

    If, perchance, you’re being told that by using a Beneficial Interest Company Trust (BICT) you can avoid the need to remortgage, then think again.  BICTs constitute a breach of your mortgage terms and conditions, and some lenders have powers to call in the debt if any others do so even if your account with them is otherwise in good order.

    The transactional costs

    The value of your time to one side, moving from being a private landlord to a corporate one will incur you in the following costs: -

    • CGT and SDLT if you don’t qualify for S162 Incorporation Relief (you won’t know until it’s too late)
    • Early redemption charges
    • Brokers fees
    • Lenders fees
    • Legal fees
    • Loss cannot be carried forward

    Whilst not in themselves direct transactional costs, being a commercial borrower impacts you in the following ways: -

    • Significantly reduced choice of lenders and higher interest rates; the majority won’t lend to limited companies, and none are keen on BICTs as they fundamentally weaken their ability to pursue the debt.
    • Lenders will mostly require full personal guarantees on a joint & several basis from all the directors and shareholders (if the company goes bust you remain responsible for the debt).
    • Lenders will take a debenture (legal charge) over the company’s balance sheet, which restricts your ability to make best use of your director’s loan account if at all.
    • You’re tied in to the first lender and their appetite for further lending, if any, meaning that each new acquisition or remortgage may need a new lender and a new company if your existing lender isn’t interested.
    • If property prices fall thereby increasing the loan to value beyond the point to which the lender originally agreed, you’ll have to find the cash difference
    • Restrictions on what you can borrow for i.e. remortgage to fund lifestyle.

    The tax position

    Limited Companies and the individuals within them are taxed up to seven different ways: -

    • Corporation Tax (19% falling to 17%, but could be uplifted for ‘property/investment’ companies, as CGT was for individuals)
    • Capital Gains Tax on personal withdraws of capital resulting from selling assets (10%, 18%, 28%)
    • Directors Loan Account Tax (32.5%)*
    • Dividend Tax (7.5%, 32.5%, and 38.1%)
    • Income Tax (20%, 40%, 45%, and 60% on the slice between £100,000 and £123,700)
    • Employees and Employers NIC (12% and 13.8% respectively)
    • Inheritance Tax (40% - ‘investment’ companies, i.e. those that hold residential property for 12-months or more for the sole purpose of collecting rents, are fully subject to IHT)

    *FYI, very short duration bridging loans where the money never leaves the conveyancer’s client account(s) and has no obvious commercial purpose is tax avoidance!

    Compare that with the benefits Mixed Limited Liability Partnerships enjoy, and you’ll see why we prefer them over the simple limited company route.

    When properly arranged and managed, hybrid tax and property ownership delivers a recognised business arrangement that means: -

    • No need to remortgage or change title, thus no CGT or Stamp Duty
    • Tax from your property income at basic rate regardless of how much you draw
    • Seamless succession planning with Inheritance Tax typically mitigated within two years
    • Two layers of commercial limited liability and protection against family/marital break up
    • Maximum commercial flexibility and choice of finance
    • Being fully in line with Government policy to professionalise the sector and compliant with both the letter and spirit of the law
    • Quick, easy, and cheap to unwind if the rules change
    • No tax on the withdrawal of capital
    • More money in your pocket ?!

    The legal position

    “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”  Lord Justice Tomlin - IRC v Duke of Westminster (1936)

    • HMRC clearance is NOT required
    • Hybrids do NOT fall under the Declaration of Tax Avoidance Schemes (DOTAS) provisions
    • Hybrids do NOT fall foul of the General Anti-Abuse Rule (GAAR)
    • Hybrids ARE allowed under the Generally Accepted Accounting Principles (GAAP)
    • Hybrids are legitimate business structures and NOT tax avoidance schemes
    • Hybrid income IS treated as trading income
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    Tony Gimple

    Founding Director

    Less Tax For Landlords


    Hi Tony,

    Thank you for your reply & compelling reasons for not incorporating.

    In your view Mixed Limited Liability Partnerships is the answer to mitigate implications of S24? If so how do underwriters see this arrangements when assessing new (re)mortgage applications?

    Thanks,

    Pankaj

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    Note that some of the reasons given are exaggerations or just misleading.

    • Personnal guarantees just leave you in the same position as when not incorporated so are neither a disadvantage or advantage
    • Some lebders do not require a debenture
    • You can use multiple lenders
    • With property companies directors loans are usually made to the company and allow you to withdraw without paying tax. The tax mentioned only applies to loans made by the company.
    • NICs need only be paid if you want to - most people won't.
    • Investment companies may be subject to  IHT but so are properties help personnally so not an advantage or disadvantage.
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    I agree

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    Hi Pankaj, sorry for the delay in getting back to you.

    None of our clients using a mixed partnership have had a problem in getting new or remortgages accepted. That said, not every broker understands how they work, so you will need a specialist.

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    Tony Gimple

    Founding Director

    Less Tax For Landlords

    Hi,

    Thanks for your reply. Discussed all the points again with the accountants. They have taken them on & will come back with the best way forwards.

    My worry is exactly that walking into the terrority where a specialist is needed for usual affairs. With the changes in legislation, it is clearly a debate even among the experts which way is the right way.

    The advise to not incorporate for now is accepted by the accountant but is convinced having a partnership paves way for the future if it becomes necessary.

    Now the open discussion point is should be a LLP or a partnership? No change to title deeds, properties will continue to be owned Jointly among the husband & wife.

    Thanks,

    Pankaj

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    Operating as a professional property business is a specialist area, and thus needs specialist advisors.

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    Tony Gimple

    Founding Director

    Less Tax For Landlords