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Hello and welcome to my topic,
I have a couple of questions regarding tax on rental income which I need to make clear.
I have read a few books on property lettings, property investments and how to be a landlord but I am still to find answers to my questions.
I own two properties in Romford, Essex on my name and I am renting both of them out.
I am paying tax as a self employed person but considering the tax changes I have established a limited company.
My plan was to give the properties to my company and start paying tax through my company, which is much lower. The problem is, is that I have to pay capital gains tax and stamp duty when selling the properties to my company, which will be a hefty bill. So my first question is: is there a way to avoid paying stamp duty and cgt in my situation when giving the properties to my company. I have read that, it is possible to do that if you have 3 or more properties and if you can prove that you spend more than 20 hrs work and you run them as a business.
My second question is: is it possible to pay my company ONLY THE PROFIT from the rent that I receive and this way I can pay the taxes through my company. To me more specific, lets say I receive £1000 rent per Month, and I have £500 expenses (Mortgage and other expenses). I will pay £500 to may company (for property maintenance). So I make £0 profit as self employed therefore £0 tax as self employed. My company will make £500 profit and I can pay tax as a company which is much lower than being self employed.
I hope that makes sense and someone has a good advice for me.
Thanks for your question. You are correct in saying that generally if you move property from being owned personally into a company the you will be liable to both CGT and SDLT on the transfer. The CGT exemption you are referring to is in connection with s162 TCGA 1992 and its application to BTL property is from a ruling in the Ramsay Case. Basically the key rules arising from that case require that you must spend on average 20 hours per week working in your property business and it must be run as a business. In the Ramsay case the lady concerned had her only income coming from her property business and this together with the hours she worked on her business were the key deciding factors. Since you are also self employed it may be difficult for you to meet the criteria for this relief but without further information I cannot be certain..
As for tax avoidance schemes to help you move your properties into a company I would advise you that HMRC regularly challenge SDLT schemes that they become aware of and state that they have a 100% success record in beating such schemes. As for avoiding the CGT tax I have come across another scheme which claims to work by moving ownership offshore using a combination of trust and companies. The issue with this is that it again relies upon s162 for part of its effectiveness but I believe that legislation in Finance Bill No2 2017 which is currently going through Parliament will make this scheme ineffective and I do not believe it works.
One other matter which you have not mentioned is the value of the properties. If you hold residential property in a limited company and the value of the property exceeds £500k then you are caught within ATED and have to make quarterly returns to HMRC. This is the case even though there is an exemption from ATED Tax for Buy to Let investments.
Lastly have you considered the tax cost of holding the properties through a company if you want to sell a property and take the money out of the company. This is really expensive in terms of tax cost.
Owing to the increase in the dividend tax which was announced at the same time a the s24 legislation the difference in income tax cost is not that different holding property personally or through a company. Having looked at the calculations for various levels of tax payer I have found that it is generally only the 45% (i.e. those earning over £150k a year) who benefit from holding property through a company.
You haven't given an indication of your current earnings or the level of tax you pay but I would suggest getting some advice on how the changes will impact on the tax you pay. Then if there is an issue consider incorporating your self employed business rather than the properties the incoporation of a trading business is relatively easy and won't give you any of the issues that incorporating the properties will. Then when that is done consider setting up a separate limited company to buy any future properties through.
I hope that the above helps.
I assume you do not have an accountant or tax advisor? If you did they would have already provided you with draft figures on the tax you will save over the next 20 years having rental properties in a company instead of a self employed person.
Have you set the company up online or did you pay an organisation to set the company up? How did you set the company up in terms of share capital and distribution of profits going forward.
Every persons situation will be different, it will depend on how long you keep the properties, what tax rate you fall under, what your plans are for the future in terms of increasing your portfolio and lots of other personal questions, it is not a black and white scenario.
You need to look at the fact if you are an higher rate tax payer you can use the profits in the company to pay into your pension as an employer contribution providing you with 19% tax relief and using your rental properties to increase your personal pension funds for retirement.
Another thing that many people are missing about having a company is that you can raise a massive personal income pot from your retained profits when selling the properties in the future.
You may pay 28% capital gains tax, but currently only 7.5% on personal tax taken out. Where as with a pension you are going to pay the basic 20% tax and again the capital gains tax on the sale of the properties when retiring.
With a company you have a greater control on how you distribute those funds.
The government is making people pay the stamp duty, but when you sell the property in the company you are in fact getting 28% capital gains tax relief on that stamp duty you paid well in advance and so the chances are there will be a tax shortfall in the treasury when landlords retire in the future. They are only interested in maxing out current tax possibilities.
Furthermore if you keep the property for say 20 years you can possibly guarantee the mortgage interest you are losing with S24 as a self employed landlord will more than cover over the 20 year period the stamp duty on the property you pay initially by being a company and therefore again it is a short sighted view being used in my opinion.
All of this of course is dependent on your circumstances and your intentions, but generally you do have more tax planning opportunities with a company and if you have a good accountant they will be able to direct you in the long term view of the business.
When planning what you are going to do you need to look to the future rather than just the next 3-4 years because that will be where you save the money.
In terms of selling the two properties into the company to save you capital gains tax, you should sell one property before the end of this tax year to take advantage of your CGT exemption and then the other in the next tax year, this means you take advantage in both tax years rather than selling them at the same time and paying more CGT.
Good luck with everything.
Accountant | Wayne Ashcroft Limited
Thank you so much for your response. I am not too informed at the moment so I am just looking for what is best for me.