Many landlords are considering the possibility of running their residential property business through a company; but is this wise?
You might want to incorporate for various reasons, but usually it would be:
- to reduce the tax payable on the rent to 20 per cent;
- to avoid the restriction in relief for interest costs from April 2017 onwards, which does not affect companies; and
- to make inheritance tax planning simpler.
If you reinvest the profit in the business (and do not need the money personally), using a company sounds like a good idea. Clearly, there would need to be a change in the ownership of the properties, so the cost of incorporating an existing business needs to be considered.
First, the company would have to pay stamp duty land tax (SDLT) (at the additional property rate) on the market value of the properties acquired. Second, you would have a capital gains tax (CGT) liability based on gains up to the market value of the properties transferred.
For some landlords, it might be possible to take advantage of incorporation relief. This enables a business to be transferred to a company without triggering a CGT charge, so long as the transfer of net assets is wholly in exchange for shares
There is, however, uncertainty as to whether simply owning rental properties amounts to a ‘business’ . Much will depend on how much time you personally spend on managing them; HMRC might regard 20 hours a week as a minimum requirement.
If you consider incorporation relief might be available for your property business but the gains on your portfolio are significant, it might be advisable to seek a non-statutory clearance from HMRC before you make the transfer to the company.
Even then, a key issue is whether your lender will allow you to transfer the properties with their existing mortgages. If you have to take cash out of the company to repay the loans (even if the company negotiates new loans to pay you for the properties), incorporation relief would not apply in full and you would have to pay CGT on the cash element.
For many landlords, CGT and SDLT will make incorporation too expensive to contemplate - in which case they might be better advised to continue with personal ownership of the existing properties and to set up a company for subsequent acquisitions.
An alternative option
Another route you could consider is transferring your properties to a limited liability partnership. It is possible to do this without paying CGT or SDLT so long as all the other partners are members of your immediate family. This would not of itself reduce the rate of tax payable on the rental income, but it does pave the way for IHT planning and moving income around the family. In some ways, such an LLP can act almost as a family trust, but without the IHT when you put the properties in.
Please contact your RSM tax advisor if you wish to explore the possibility of transferring your property business to a company or an LLP.