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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?
Why, in our option, incorporation is the worst and most expensive mistake landlords will ever make.
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: -
Whilst not in themselves direct transactional costs, being a commercial borrower impacts you in the following ways: -
The tax position
Limited Companies and the individuals within them are taxed up to seven different ways: -
*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: -
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)
Less Tax For Landlords
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?
Note that some of the reasons given are exaggerations or just misleading.
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.
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.