Landlords Taxes and Some Ways to Reduce Them
So, it’s now over a year since George Osborne brought in the so called, “Tenant Tax”, which drastically increased the taxes that the majority of unincorporated landlords will have to pay.
And ever since, landlords have been looking at ways to get around it, legally.
Mark Alexander, the founder of Property118, recently sent me a presentation showing how landlords can do this. It looks reasonably clear and the NLA accredited tax advisors, Menzies, (Stephen Hemmings spoke brilliantly at our recent seminar), confirmed that they were aware that various tax advisors had used similar approaches.
In this article, I will explain, in very rough outline, how it seems to work. Please do have a read.
But do note, at LettingFocus.com, we are not IFAs nor tax advisors, so the purpose of this article is simply to relay what Property118 told us about their ideas. You will have to make your own mind up!
A Tax Caveat
The only caveat I can think of regarding tax is that there is nothing to stop the government applying the same changes to the tax rules for incorporated landlords as they already have for private unincorporated landlords, at some point in the future. Indeed, many commentators think that one objective of the tax changes was to try to get landlords to incorporate so that the government can then more easily control and tax the private rented sector, (it being easier to control a company than private individuals).
As I say, that is just one view.
At this point, it is true to say that most unincorporated landlords are still sitting on their hands and considering what to do.
To Incorporate or Not?
The advantages of running your business through a property company can be summarised as follows:
Corporation tax is now, and generally has in the past, been lower than the highest rate of income tax.
Indexation relief is available for capital gains.
The main disadvantages are as follows:
There is no Principle Private Residence (PPR) Relief, which is useful if you have ever lived in the property and also, related to that, no Private Letting Relief either.
No annual exemption from capital gains.
Tax is payable when taking money out of the company as dividends or for salaries.
Some costs are involved in setting up the company and there is a requirement to file accounts each year.
Finance from lenders may be at higher interest rates, lower LTVs.
Summary of the Approach
Anyway, some of the key points of the various approaches set out by Property118 are as follows.
Companies are exempt from restrictions on finance relief costs.
Incorporating can “wash out” all capital gains to date.
Incorporation Relief mitigates Stamp Duty and Capital Gains Tax on transfers.
Beneficial Transfers are an alternative to refinancing.
Partnerships can also be used to optimise your tax position.
If you look to incorporate, any transfer to a corporate structure, often results in a capital gains tax charge and a Stamp Duty Land Tax (SDLT), or (LBBT charge, if the property is in Scotland). And you will need conveyancing to do it, of course. Finally, you may need to borrow more money to repay any old loan facility on the property, with possibly worse loan rates, plus fees for the new financing and also, survey fees.
But something called Section 162 Incorporation Relief can help reduce the CGT. It works by allowing you to exchange equity in your properties for shares in the company you are transferring your properties too. The value of shares is then offset against the capital gain. If the value of those shares is less than the capital gain, then some CGT will be payable on the difference. If it is more, then the taxpayer can create something called a Shareholders Loan Account (SLA).
With an SLA you could take a short term offset loan to increase your borrowings to base costs. Then, once incorporation happens, the offset account in your name redeems the short term loan facility and the liability is now on the company, which transfer the company indebtedness to you. The company can repay this amount of money to you out of retained profits free of tax.
It’s worth noting that the best time to sell or trade properties is immediately after incorporation because the base cost is the transfer value to the company, hence nil tax or nil gain.
Property118 Limited provide a bespoke service to obtain non-statutory clearance from HMRC for reliefs applicable to landlord incorporation for a fee. If clearance is declined the fee is refundable in full. Property118 say non-statutory clearance provides certainty, providing, of course that you have told the truth.
With Section 162, the rules say you must be able to justify committing a substantial amount of time and effort to running your property rental business (not including outsourced work) and a good rule of thumb is a minimum of ten tenancies (see HMRC v Ramsay). Plus, you must transfer your entire business, you cannot pick and choose the properties to be transferred. This all means it may not be for all folks!
Beneficial Ownership is an established principle, just like if you own shares in a company you could buy on the stock exchange. However, there are some issues in relation to legal title and the mortgage loan on the property.
In essence, your mortgage lender has secured its loan against the legal title of the property. And you cannot change this without refinancing.
However, you can change the beneficial ownership, unless your mortgage lender’s T&Cs specifically exclude it or insist on their permission being granted. This is rare, but it is checked. Mortgage lender consent is not required and seeking permission is not recommended.
Property118 say that some brokers may say that beneficial transfer is risky but Property118 say it is invisible to lenders unless you alert them to it. They also point out that there has never been a repossession case granted on the basis of beneficial interests having been transferred.
Property118 go on to say that many mortgage brokers don’t like beneficial transfers because they want your refinancing business. They say people should beware brokers who advise you to seek lender consent in the knowledge it will be declined.
That is a summary of this in very rough outline. Property118 says the process of incorporation via beneficial transfer belongs jointly to them and Cotswold Barristers.
If you are interested in going into this stuff in more depth, please do get in touch with Property118, who will be able to set up a private consultation with you and send you the full presentation around these tax ideas. Go to Property118.com/private-tax-consultations as a start point.
See also, Menzies.co.uk for tax advice. I’ve found them to be very good too.
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