If you own a business which lets out residential property, you will not be alone if you are finding it difficult to assess the impact of the many tax changes that have been made in recent years.<\/p>\n
It doesn\u2019t help that some of these changes only affect incorporated businesses (limited companies) whilst others only affect unincorporated businesses (private landlords & partnerships).<\/p>\n
But of all the changes, the one that is likely to have the biggest impact on most landlords is the restriction of tax relief on interest and financing costs, and that applies only to unincorporated businesses. As a result of that particular change, some highly geared property businesses may find that future tax charges actually exceed the profits they make!<\/p>\n
So why not incorporate and avoid the new rule? To answer this question you will need to consider various complex issues, including the following:<\/p>\n
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Refinancing<\/strong><\/p>\n First of all, you will need to establish if your lender is prepared to allow the proposed new company to take on the debt attached to your portfolio. If you have to refinance, rather than novate your loans, it may affect the availability of \u2018incorporation relief\u2019 (referred to below) so that a Capital Gains tax liability is crystallised.<\/p>\n <\/p>\n Capital Gains Tax<\/strong><\/p>\n If your properties have increased in value since you acquired them, transferring them into a company will ordinarily give rise to a capital gains tax liability, even though you don\u2019t actually receive any cash in the process.<\/p>\n This outcome can be avoided if you are in \u2018business\u2019 for the purposes of \u2018incorporation relief\u2019, but until recently HMRC have routinely denied that a property rental business could ever be a \u2018business\u2019 in this context.<\/p>\n Since Ramsay v HMRC [2013], they have had to revise that view in circumstances where the requisite level of \u2018business activity\u2019 can be demonstrated. However, relief is by no means a foregone conclusion and it is therefore essential to get expert advice and clearance before <\/em>incorporating.<\/p>\n <\/p>\n Stamp Duty Land Tax (SDLT)<\/strong><\/p>\n A transfer of properties by an individual to a company will give rise to an SDLT charge, but a transfer of properties from a partnership to a company may not.<\/p>\n If a genuine partnership exists it would be best practice to formalise it by way of a partnership agreement before transfer, but forming a partnership immediately prior to incorporation simply to eliminate the SDLT charge does not work and simple co-ownership does not qualify as a partnership in this context.<\/p>\n If SDLT is payable it may be possible to claim relief on transfers of multiple properties.<\/p>\n The SDLT liability on a property portfolio can be significant so once again you need expert advice.<\/p>\n <\/p>\n