Bod’s decision on whether or not to incorporate his rental property business

Bod has a dilemma.

He is a portfolio landlord who is badly affected by the Section 24 restrictions on finance cost relief.

We have been friends on Facebook for a long while and Bod messages me regularly.

As you can probably guess, Bod is a made up name because my friend wants to retain anonymity.

This is Bod’s dilemma ….

This year Bod will pay around £6,000 of extra tax as a result of S24, rising to £9,000 next year and then £12,000 a year thereafter.

The solution to this is incorporation.

However,If Bod incorporates his business it will cost him around £100,000 in Stamp Duty. There is no special treatment for individual landlords, only for partnerships.

Bod is NOT interested in forming a partnership with another person in order to benefit from the advantageous Stamp Duty treatment of partnerships. He simply doesn’t want to have anybody else in his business.

Last night Bob made his decision to incorporate his business and pay the Stamp Duty based on the following:-

1. His properties are currently leveraged to around 50% and he could easily release the money to pay the Stamp Duty (and more) by refinancing, without causing himself a ‘latent gains’ problem
2. The £100,000 required to pay the Stamp duty will cost him around £3,500 a year to borrow in terms of interest (based on a 5 year fixed rate).
3. His EROI (Effective Return on Investment) will be 9% next year (i.e £9,000 saving on £100,000 of investment)
4. His EROI (Effective Return on Investment) will be 12% thereafter (i.e £12,000 saving on £100,000 of investment) and possibly more if he decides to retain profits to pay down mortgages. this is because the company will only pay 19% tax if it retains profits to pay down mortgages whereas Bod would pay 40% tax.
5. Bod plans to keep the properties long term and has no confidence in s24 being repealed.

Bod agreed for me to share his thoughts in this article subject to not mentioning his real name. We agred that several other Property118 readers might have the same dilemma as Bod.

Bod’s incorporation of his rental property business will be very straight forward because it qualifies for rollover relief on capital gains under TCGA92/S162

His costs will be the Stamp Duty and fees associated with remortgaging. However, given that Bod was planning to remortgage onto 5 year fixed rates anyway he doesn’t need to factor that cost into his decision. The only other costs will be for dealing with the Business Sale Agreement, which in Bod’s case is very reasonable.

Further benefits that Bod hadn’t previously considered.

ONE – If Bod was to sell and of his properties without restructuring he would have to pay 28% CGT on his capital gains since purchasing them. However, after he has incorporated his company will only need to pay corporation tax at a much lower rate on any capital appreciation from the date of his incorporation. In Bod’s case, that’s over £1,000,000 of CGT washed out of his properties immediately and a reduction in tax on future capital appreciation from 28% to a predicted 17% UK corporation tax rate in 2020.

TWO – Bod can now make pension contributions into a SSAS whereas he couldn’t before. of he ever wants to invest into commercial property, a SASS would allow him to do so in an environment which is free of any tax on income or capital gains. Furthermore, pensions are exempt from IHT.

THREE – If Bod ever decides to live in Portugal and qualifies for the NHR scheme he will pay no dividend tax on dividends declared from his company.

FOUR – Bod can pay himself dividends up to his basic rate tax allowance and only pay 7.5% basic rate dividend tax. He can also pay a salary to his children to use up there nil rate band dividend allowance to see them through higher education if he wishes to do so.

FIVE – There is a lot more that Bob can do with shares in his company for IHT planning purposes than he ever could as a sole owner.

There are other tax benefits such as running an electric vehicle through the company but I will stop there. Hopefully you’ve got the general picture by now?

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