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Did you know…more than 100,000 landlords made property purchases through Limited Companies last year. There are many reasons that landlords may have chosen to plan in this way, including;

  • Tax efficiency with rental profits being taxed at 20% Corporation Tax rates. Rates are expected to fall to 17% by 2020!
  • Succession planning – it’s much easier to plan with company shares than give away portions of physical ‘bricks and mortar’.
  • To retain the benefit from mortgage interest rate relief in a company when the Government changes for individuals comes into force in April 2017. It is thought that the mortgage interest relief changes could affect over half of all UK landlords.
  • Inheritance tax planning – A recent survey of 2,517 landlords found that 61% of property in the UK is owned by the over 55 age group. This is also the age group with the most disposable income and the group that require assistance with their exit and succession planning.

The demographic ‘time bomb’ is ticking for buy to let landlords. 

UK BREXIT CONSIDERATIONS:

As stipulated in Brexit speeches by Theresa May, should a scenario arise where the EU wishes to make it difficult for the UK to leave whilst imposing harsh tariffs on trade, Mrs May stated that “We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”

Would the UK therefore become a ‘Tax Haven’?

After all of the demonisation that has occurred over the last two years of the so called ‘Tax Havens’ and ‘Tax Dodgers’, it seems the UK itself may well end up lowering tax rates to attract companies as an incentive to pay less tax!!

Should you have any queries in relation to the above, please do not hesitate to contact your local accountants on 0161 359 4227/0845 054 856

Owning a property portfolio can create a challenge for even the most experienced investor. As of 2015, the Government’s amendments to property taxes has left most Property Investors with the question of how to make their investments financially viable.

Changes to the availability of mortgage interest relief are due to start affecting rental profits from 2017/18, along with changes to the long-standing concept of the Wear and Tear Allowance. Other barriers to entry to the property marketplace include the increasing SDLT costs for buy to let and second homes over £40,000.

In many cases, property is commonly held personally either by the individual or as part of a partnership. These portfolios are often built up over a number of years, going through the property lifecycle and morphing into a property business. Holding a property in this manner allows freedom of choice in respect of the type of property, i.e. it can be either residential or commercial, whilst also offering the investor flexibility with the asset, access to income and capital, and all within a reasonably straightforward legal and compliance environment. The question these businesses now face is what to do next?

A common theme amongst property investors is around the concept of incorporating their property business, that is taking the investors’ property business and incorporating into a UK limited company. This is suitable for those who run an active property business and want to create an Income Tax (“IT”) and Capital Gains Tax (“CGT”) efficient environment.

Whilst the advantages and disadvantages of various ownership structures are often discussed, for many property investors who wish to consider a change of ownership structure, the CGT consequences of property incorporation can be prohibitive without the ability to claim Incorporation Relief under the Taxation of Chargeable Gains Act (TCGA) 1992

Incorporation Relief

Incorporation Relief allows the investor to defer their charge to CGT by rolling over the chargeable gain arising on transfer of the property to the company against the base cost of the new company shares. Therefore, the gain will become subject to CGT when the shares in the new company are sold.

Incorporation Relief is automatic and no election is required by the taxpayer.

There are three conditions to be satisfied before Incorporation Relief is given:

  1. The business transferred must be a “going concern”;
  2. All assets (except cash) must be transferred to the company to obtain the relief;
  3. The consideration paid to the partner/individual by the company must be wholly or partly in shares.

While the partner/individual, when determining the availability of this relief, can manage Conditions 2 and 3, the concept of “business” in condition 1 is critical. Below, the concept of “business” for the purposes of Incorporation Relief is considered and the practical steps a Property Businesses can take to ensure they qualify for this valuable relief are identified.

Transfer of a ‘Business’ as a going concern

Business is not defined for the purposes of TCGA 1992, so HMRC agree that the word must be given its normal meaning. Whilst the term ‘Business’ includes a `trade’, the two words are not synonymous.

The question arises whether the individual/partnership conducts a business for the purposes of Incorporation Relief, or whether it would be considered a passive investment. This is a question of fact and in the absence of clear definitions in legislation or from HMRC, each case must be judged on its own merits.

Six criteria for determining whether an activity is a business was set out in the case of Customs and Excise Commissioners v Lord Fisher [1981] (“the Fisher case”) heard in the High Court in 1981:

  1. Whether the activity is a ‘serious undertaking earnestly pursued’;
  2. Whether the activity is an ‘occupation or function actively pursued with a reasonable or recognisable continuity’;
  3. Whether the activity has ‘a certain measure of substance as measured by the quarterly or annual value of taxable supplies made’;
  4. Whether the activity was ‘conducted in a regular manner and on sound and recognised business principles’;
  5. Whether the activity is ‘predominantly concerned with the making of taxable supplies to consumers for a consideration’; and
  6. Whether the taxable supplies are ‘of a kind which…are commonly made by those who seek to profit by them’.

Conclusions

In the absence of a definition of a “Business” for the purposes of claiming Incorporation Relief, determining a client’s entitlement to the relief is a subjective exercise. As the burden of proof lies on the taxpayer, it is imperative that the partner/individual maintains their records to ensure that any enquiry into the claim can be meet with a robust and convincing response.

All evidence should point towards the property business being a serious undertaking earnestly pursued, and not a passive holding of investments.

As the property environment continues to come under further scrutiny and taxpayers, owning residential property, look at ways of improving their tax position, advisors should have a selective and robust procedure for analysing a scenario. This will ensure that the business is a qualifying business for the purposes of Incorporation Relief, to avoid challenges in the future.

If there is anything in this article that you would like to discuss further, please contact Richard Fleming or Andy Wilson

If you have decided to start to build a residential property portfolio then you may be wondering whether to do this in your own name i.e. personally owned or whether to do this through a Limited company.

Below we have set out a brief summary of the pros and cons of holding buy-to-let residential properties in personal and company hands:

Personal

Advantages

  • No additional reporting requirements (all income and expenditure reported on the individual’s Tax Return)
  • Possibly more choice with regards to mortgages albeit lenders are now much more willing to lend to companies.

Disadvantages

  • Mortgage Interest relief restriction being phased in from April 2017 reducing the effective rate of relief down to 20% by April 2020
  • All profits taxed at the owner’s marginal rate of tax (i.e. up to 45%)
  • Unlimited risk i.e. not limited liability protection

Company

Advantages

  • There is no restriction on mortgage interest relief and so the full value of any interest paid is set against income when calculating profits.
  • Profits are currently taxed at 20% with this rate falling to 19% from 1st April 2018 and then to 17% from 1st April 2020. Additionally, the Chancellor has indicated that rates may well come down to below 15%.
  • Commercial protection should anything go wrong with the business i.e. the protection of limited liability.

Disadvantages

  • Potential additional tax should profits be taken out of the company.
  • The additional filing requirements for the company (Companies House, HMRC).
  • Possibly slightly less choice in terms of lenders albeit this is changing.

There has been a definite trend in the past year or so for buy to let investors to use companies and the main drivers for this are the restriction of mortgage interest relief for individuals and the much lower tax rates for companies. As a result, more and more mortgage lenders are prepared to lend to companies.

In addition to structuring your property business in the most tax efficient manner we are also able to assist with funding & mortgage requirements

To discuss your specific circumstances then please do not hesitate to contact us.

Call us on 0161 359 4227/0845 054 8560

When it comes to renting a room in your property you have two options on how to deal with this income:

  • You can treat the income as taxable rental income and from this you can deduct an apportionment of allowable property costs to determine your taxable rental profit
  • You can use rent a room relief

Rent a room relief is available to individuals renting out a room (or part of their home) in their own private residence.

There are a number of conditions attached to the relief with it being key that the accommodation is furnished and is part of the individuals main or only home for the tax year the relief relates to.

The relief cannot be claimed when the property is let to a business (so you can’t rent your room to your limited company and claim the allowance).

As long as the rental income is below the rent a room scheme threshold for the tax year then the income is automatically tax free.

However, no costs are allowed to be offset against your rental income if you use this scheme.

Also bear in mind that your rental income will include any money you receive from your lodger for meals and services such as cleaning.

In 2015/16 the rent a room relief limit was £4,250 per household but for the 2016/17 tax year (since 6th April 2016) the allowance has increased to £7,500 per household.

If you share the rental income with someone else such as a partner or spouse then the allowance is shared between you, so for the 2016/17 tax year it would be £3,750 each if applied on an 50/50 basis.

As long as your rental income is below the threshold then the scheme applies automatically and you won’t need to report anything on your tax return.

However, if you earn more than the rent a room allowance you have two options on your tax return:

  • (A) You can opt in to the rent a room relief allowance and pay tax on any rental income above it
  • (B) You can record your rental income and allowable costs on the property section of your tax return in the traditional manner

Where your rental income is above the rent a room allowance, HMRC will automatically assume option (B) unless you choose to use rent a room relief by ticking this option on your tax return.

You can change which method you use from tax year to tax year, which can be handy if your circumstances change.

Sometimes it can be beneficial to not use the rent a room scheme and instead report the rental income and costs on the property pages of your tax return.

For example, if you have a portfolio of rental properties and with apportioned costs the rental of a room in your home generates a loss, you could instead offset that loss against other property income, which would be more tax efficient than using rent a room relief.

In his summer budget, George Osborne announced that landlords will only be able to offset mortgage interest at the basic rate of tax (20%) by 2020. This will be introduced gradually from 6 April 2017. The restriction will not apply where the property meets all the criteria of a furnished holiday letting.

Current situation
Landlords pay income tax on their rental profit by declaring the amount they earn on a self-assessment tax return. The landlord can deduct mortgage interest (plus associated costs like arrangement fees) along with all other costs before determining the taxable profit. Tax is then charged on the rental profit applying the normal income tax bandings – 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.

New rules
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their rental profits. The relief in respect of finance costs will be restricted as follows: 

2017/18 75% allowed 25% basic rate
2018/19 50% allowed 50% basic rate
2019/20 25% allowed 75% basic rate
2020/21 Nil 100% basic rate

 

Example:
Rental income £10,000

  • allowable expenses not including finance cost £2,000
  • finance cost £3,000.

The tax position for a basic rate taxpayer will be as follows:

  Profit before finance cost Finance cost allowed Taxable profit Tax at basic rate Tax relief on finance cost Total tax due
Current 8,000 3,000 5,000 1,000 Nil 1,000
2017/18 8,000 2,250 5,750 1,150 (150) 1,000
2018/19 8,000 1,500 6,500 1,300 (300) 1,000
2019/20 8,000 750 7,250 1,450 (450) 1,000
2010/21 8,000 Nil 8,000 1,600 (600) 1,000

 

While the total amount of tax due has not changed, this does not mean that the landlord’s tax position is unaffected. As taxable profit has increased from £5,000 to £8,000, it is possible that a taxpayer who is currently at the limit of the basic rate band might find himself in a higher rate tax position when nothing else has actually changed.
 
The tax position for a higher rate taxpayer will be as follows:

  Profit before finance cost Finance cost allowed Taxable profit Tax at 40% rate Tax relief on finance cost (20%) Total tax due
Current 8,000 3,000 5,000 2,000 Nil 2,000
2017/18 8,000 2,250 5,750 2,300 (150) 2,150
2018/19 8,000 1,500 6,500 2,600 (300) 2,300
2019/20 8,000 750 7,250 2,900 (450) 2,450
2010/21 8,000 Nil 8,000 3,200 (600) 2,600

 

As expected, a higher rate taxpayer ends up paying more tax as relief for finance costs is restricted to the basic rate.

The company option
As companies continue to benefit from the full relief, it might be possible for landlords to consider transferring properties into limited companies. While corporation tax is due to fall to 19% in 2017 and 18% in 2020, when investing through a company income can only be paid out to the shareholders as a dividend.

From next April, directors can receive £5,000 annually tax-free, with higher rate taxpayers paying a 32.5% dividend tax on any income above this amount. If you’re considering this option, proceed with caution.