14:42 PM, 26th November 2010, About 12 years ago 18
Buy to let landlords making big rental profits and looking to save tax often flirt with the idea of running their business through a limited company.
The main benefit is a company can be a tax-effective way of managing income.
Profits within the company are taxed at lower rates than top rate income tax and shareholders can manipulate their personal income by declaring dividends at just below the top rate threshold.
For the current tax year that means a full time landlord and his non-working wife could draw £43,875 each from a company before either pays 40% tax.
One of the problems is transferring buy to let properties in to a company.
Assuming a husband and wife own 10 buy to let properties valued at £1.6 million, on the transfer they have to consider capital gains and stamp duty implications.
If a business was to transfer a trading property, like a shop, workshop, or factory in to a company, the property owner could apply incorporation relief to negate the capital gains tax element because the business is a going concern.
Residential property owners cannot benefit from incorporation relief because tax law says although business rules underline how a property investment is taxed, it’s still an investment and as such is not a going concern.
Case law supports this view – judges have held that even if landlords work full-time managing their properties, even though the activity comes close to a business, it does not quite hit the mark.
So, transferring a property portfolio in to a company will incur capital gains tax if a gain has been made.
Then comes stamp duty. Expect a hefty bill of 5% of the portfolio value as the transfer is considered a linked transaction and stamp duty is charged at the highest rate on the total value of the portfolio.
And having done away with about a third of the value of the portfolio in tax, do not forget the legal fees involved in the transfer plus hefty mortgage arrangement fees and legal costs that can run to 3%+ of the borrowing as well.
Some accountants and lawyers will argue that claiming incorporation relief on a residential portfolio transfer is not tested in law – which it is not.
The problem is HM Revenue and Customs will only take a look at the matter after the transfer when the deal is too late to unravel – and those same tax advisers will want £10,000 or more of your money in barrister’s fees to seek a legal opinion to defend your position.
If you want to make legal history and have money to burn, then you could open the door for many landlords to follow in your footsteps – or you could waste hundreds of thousands of pounds.
If income tax on rental profits is an issue, we have plenty of proven methods for you to reduce it. If you need to sell you need to take advice, especially if your property(ies) have increased in value since you purchased them. If you want to access your capital gains you may not even need to sell.
Before you make any choices it’s important to know what choices you have to make.
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