First published March 2018. Edited for our website by Ben Rose – Click here to download the original article in PDF format and subscribe to updates
And if you do the wrong thing now, you’ll be walking towards the flames and not the extinguisher!
A simple Google search will reveal that 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 could end up being the most expensive ‘business’ decision they ever make.
Talk about jumping out of the frying pan and into the fire!
Apart from the transactional costs (re-mortgaging, professional fees, etc.) and the higher tax regime that you’ll likely eventually find yourself in, you’ll first want 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 in the process.
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 until it’s too late to stop. (Read more on S162 at Tax Adviser Magazine: Capital Gains Tax on incorporating a property rental business)
When it comes to mortgages, upon incorporation you go from being a private individual with a whole raft of consumer legislation protecting you, to becoming a commercial borrower whom the law expects to be able to look out for themselves – a very different world.
And if, perchance, you’re being told that by using a Beneficial Interest Company Trust (BICT) you can avoid the need to remortgage, then you may wish to think again. BICTs constitute a breach of your mortgage terms and conditions, and some lenders have powers to call in your debt if any others do so.
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
• Early redemption charges
• Brokers fees
• Lenders fees
• Legal fees
• Losses 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 (although this is improving)
• Lenders will mostly require full personal guarantees (you remain personally responsible for the debt)
• You’re tied in to the first lender and their appetite for further lending (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 (i.e. remortgage) to fund a 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 ‘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 £125,000)
• 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)
For most landlords, the above information will come as something of a shock, even though they may have already received professional advice.
Thankfully though, there are alternatives to outright incorporation.
You could simply stay as you are; not every landlord will suffer, and those on basic-rate tax with small loan to values should be ok, albeit IHT and CGT will most likely remain a problem.
If, however, your goal is to maximise the commercial benefits of building, running, and growing a recognised professional property business that’s fully in line with stated Government policy, and to pass it on as intact as possible to the next generation without suffering the disadvantages associated with Incorporation, then a ‘hybrid’ approach could work for you.
Hybrid Business Structure – The best option for your property business?
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
It is important to remember that the most appropriate solution for managing a property business or portfolio will not always be a hybrid business model, and as always it depends on the exact details of your professional and personal circumstances.
Before making any decisions we recommend you take joined up professional advice to ensure you are best positioned to obtain your goals, be that to maximise the value of your business both today and during your lifetime, and/or ensuring that you can pass on your hard-earned wealth to those you care about most.
Unsure of your best option?
With a free initial assessment, we can help you understand whether restructuring your property portfolio today could be a sensible and profitable option for you.
Less Tax 4 Landlords is a specialist multi-disciplinary consultancy service that helps portfolio landlords maximise the commercial benefits of building, running, and growing a recognised professional property business. This is achieved by housing the following services under one roof: Business Planning, Tax Consultancy, Legal Work, Accountancy, Business Succession Planning, Personal Estate Succession Planning and at arm’s length, Financial Advice. By bringing together a wide range of services and expertise, we help you to maximise the value of your business both today and during your lifetime, and to create true inter-generational wealth.
Typically, Less Tax 4 Landlords can help you if you:
- Own rental property in personal names
- Are (or would otherwise be) a higher or advanced rate taxpayer
- Are a portfolio landlord with 4 or more properties and in excess of £50,000 Gross Rental Income, or you have the means, motivation and opportunity to get there and beyond with a protective structure in place
- Are looking to build, run, and grow a professional property business which is capable of being passed on intact to future generations
If you would like to find out if we can help you benefit financially from running a professional property business, take our free initial assessment here.