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  • Tax

    The BIG tax issue: Should I incorporate?



    With Section 24 around the corner, there has been a growing interest in letting your properties through a limited company.  

    Some landlords have transferred their existing personally owned portfolios into a company, some have made new purchases through a company, some have a mixture, whereas others have simply not found a corporate structure works for them.  It really does depend on individual circumstances.
     
    It is important to note:
     
    •    A limited company DOES NOT WORK FOR EVERYONE!
    •    Consider all other options first.
    •    Look in to the future – are you always going to be a higher rate taxpayer?  Are you looking at growing a portfolio?
    •    Have you considered any losses you have individually?
    •    Have you considered what income you need and the implications of profit extraction from the company?
    •    Have you considered refinancing implications/options?
     
    We could write plenty more bullet points above, but there are just so many!
     
    The main problem for those who have personally owned property, is how exactly to get that into the company, and how to do it in the most tax efficient manner.  

    In particular, two of the main stumbling blocks are Capital Gains Tax and SDLT.  It is important to note, that a company is a separate legal entity, and so by transferring an individually owned property into a company is in effect, triggering a “sale.”

    Therefore, if you owned a property personally, which you then transfer to your company, you could face a CGT bill despite no money changing hands. 
     
    However, in some instances, landlords may be able to benefit from “Incorporation Relief” which essentially means the gain would roll over, and at the date of transfer, no Capital Gains Tax would be payable.  

    This would only be available if a landlord wished to transfer every property in their portfolio, not just the ones that suit them.  The difficulty here is that generally, HMRC classify letting property as investment activity, as opposed to trade activity.  

    The key therefore is to demonstrate your activities are that of a business as opposed to an investment.  This is perfectly highlighted by one successful tax case, that of Mr and Mrs Ramsay.  
     
    In this tax case, they spent around 20 hours a week actively managing all aspects of the business, and they earned no income from any other sources, such as employment income.  All repairs and maintenance were carried out by themselves.  They ran a “proper” rental business, with full systems in place, and provided extensive services not typical of your average landlord.
     
    This is a highly complex area, and professional tax advice is highly recommended in this area, as the costs of failure could be catastrophic.  
     
    We then move on to the other tax landlords could face in transferring property to a company, namely, SDLT.   However, if you are operating as a property partnership, then you could be able to transfer property to a company free of SDLT.  

    However, great care must be taken with the word partnership here.  Just simply being a husband and wife, and letting property, does not mean you are a partnership.  

    The theory is largely the same as the above with regards CGT and the Ramsay case, in that there does have to be genuine business activity as opposed to being a passive investment.  

    If, however, there is a genuine partnership of 2 or more landlords and there is sufficient business activity, then there may be scope to explore here.  The next hurdle is then running the partnership for enough years to ensure you do not fall foul of HMRC’s Anti Abuse rules (GAAR).  
     
    Again, this is very much scratching the surface, and there are many other considerations in this area; it really is essential to seek professional property tax advice to prevent any future problems.
     
    Now this is all well and good, but in the real world, what do you do if you are unsure whether you can apply the Ramsey case to your circumstances?  And have RITA4Rent come across this and been successful?  The answer is yes, we have, and it is a case of understanding your client’s circumstances fully and building a good strong argument.
     
    One easy method is to send an email to HMRC’s Non Statutory Clearance Team, writing details of your situation, along with the relevant checklist for the application. With the right wording, and the right circumstances, success can be achieved. 
     
    As an example, a client approached us recently, hoping to achieve incorporation relief.  We spent a considerable amount of time understanding their position and ascertaining whether or not there was scope to take matters further. The properties were managed by our client, he worked at least 20 hours a week in managing the tenancies and maintenance, had a small passive income elsewhere, along with many other key factors.  They wanted to send the email themselves, and asked us to draft the wording for them.

    The claim was a success and as typical with these situations, the client received the letter below:
     

     


    It can be very difficult to achieve incorporation relief, but it can be done.  But importantly, incorporation should still only be done for the right reasons and after taking good considered tax advice.  Don’t let the tax tail wag the dog!
     
    For any of your property tax needs, please do not hesitate to contact RITA4Rent, property tax specialists.  

    Reminder:  the new "Section 24 Survival Guide" produced in association with Bamboo Auctions, Property Tribes, and RITA4Rent.

    The guide is a simple and easy to understand download, which is free for anyone to access.


     CLICK HERE TO GET YOUR FREE SURVIVAL GUIDE

    SEE ALSO  -       Ltd company tax loophole set to close?

    UP NEXT -           Financing properties through a Ltd Co. with Stephen Johnson, M.D. Shawbrook Bank

    DON'T MISS -      Ltd Company vs Buying in own name

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk

    Some very good advice here

    I just want to add two things ? Being a Landlord on there late 50s I took the decision to sell some of my own property into my Company because of IHT and Succession

    S24 made me think about the future ?? which to be honest I was side stepping

    The Other reason I have moved property is to allow me to fund my pension again this helps in two areas

    1 Ring  fences funds in the pension away from IHT

    2 The Pension gives me the opportunity to have an income stream away from the Company when I retire as  a Director

    Its not all about S24 ???


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    Learn Change and Adapt ?????

    Indeed, it is certainly not all about Section 24.

    Prior to the Section 24 changes being announced, there were reasons then for and against using a limited company setup then too.  But the changes have resulted in a limited company setup attracting greater attention.  The danger is in following the pack blindly, and not making the right decisions for your own circumstances based on careful planning.

    As you say though, there are so many considerations when thinking about a corporate structure, and wider considerations too aside from tax.

    Your point on IHT is very relevant too and harks back to our point on the need to look to the future as part of your long term strategy. 

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk


    Surely if S24 makes being a Private Housing Provider unviable then there is little choice than to be a company.

    Yes a company may not he a perfect solution.

    But there is little choice if S24 breaks the business model.

    Would any PHP starting now seriously factor in S24 to their business model rather than going corporate at the outset!?

    I'd like to know whether it is viable to factor in S24 as just another cost for the sole trader PHP!?

    To me it seems the more debt you use to expand the more unviable the business becomes courtesy of S24!

    If debt expansion is restricted then that business will reduce

    I thought there was a housing crisis or rather a rental crisis

    Tenants need LL to bring more stock to market.

    S24 has the opposite effect.

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    Thanks for posting this Rita4rent it's good advice and confirm a lot of we've been advised personally .

    Though we should say that incorporation is not just for tax reasons. Not why many choose  this route for there business..

    Take The Ramsey case, that was long before Clause 24 tenant Tax.

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    _________________________________________________________________________


    The above post is not financial advice, its often me rambling - passing time on a coffee break.
    If you are looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance.


    _________________________________________________________________________


    I think four is about the Max before S24 has impact


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    Learn Change and Adapt ?????

    Double that is possible.

    Assume no other income.

    Assume properties than rent for £500pm, £6,000 per year.

    Assume you use a letting agent so your allowable expenses are at least 15% of the rent.

    Eight properties bring in £48,000, expenses are £7,200. so S24 fully implemented would say your income was 40,800.

    So you are a basic rate tax payer and not affected by S24.

    I have seven in my own name and just squeeze under the threshold.

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    Though we know that Private Finance have an interest in steering people away from ltd company mortgages (and of course as we saw in a recent thread, their figures aren't always correct/mathematically possible).

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    Well the tipping point is certainly not 4 properties for everyone, and without the calculations it is hard to check their figures, but the point that there is a tipping point seems reasonable.

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    I fell foul of the S162 rule because ALL properties must be incorporated and I did not incorporate all my properties so could not apply for the CGT relief.

    However all was not lost. note the wording "at open market value", well what is the value of the house?  We all put anticipated rent and expenses when making the mortgage application and the valuers produce the investment report from this.  But is this the Value of the property ?

    At this time I was looking at a 1m capital gain!

    Then I spoke to a RICS valuer, because I knew if I put up my houses for sale they would fetch no where near those figures, to me these investment values where fairy tale stuff.  My RICS valuer advised me to use the last 2 years figures, I did so and the gain come down to just over 75k.

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