Incorporation of properties with no capital growth?

by Readers Question

13:30 PM, 23rd February 2017
About 2 years ago

Incorporation of properties with no capital growth?

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Incorporation of properties with no capital growth?

I am thinking of starting the process of incorporation for my property portfolio and in doing so I am aware of the potential SDLT and capital gains tax implications involved. A number of my properties, as you would expect, have risen in value. shetland

However, I have a couple that have not shown any increase in value since the time of purchasing although they have been good generators of cash from rent.

It occurred to me that I could use these properties as the basis for starting incorporation thus avoiding the CG implications. Have I missed anything in my logic? Also, if I chose to go ahead would it be best to create a new company from scratch or adopt what is known as a ‘shelf company’

Many thanks in advance for anyone’s thoughts and observations

Clinton



Comments

Mark Alexander

13:56 PM, 23rd February 2017
About 2 years ago

Hi Clinton

There are far better solutions available as legislation provides incorporation relief for both CGT and SDLT in certain circumstances.

Please see our Tax Tutorial entitled "Understanding incorporation and the various costs, benefits and tax relief available" which is available free of charge via the link below.

I also recommend you to read "Sole Ownership Becomes Bad For Tax Purposes" from the same link.

LINK >>> https://www.property118.com/landlord-tax-tutorials-2/
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Graham Bowcock

10:44 AM, 24th February 2017
About 2 years ago

Dear Clinton

As to whether incorporation is suitable for you I suggest you get some sound advice from an accountant; it won't be for everyone and may not be straightforward. I incorporated a number of properties some years ago so have some flexibility and have looked at moving some personally held properties into my companies. In my case it is not worth it for a number of reasons - CGT, SDLT and some very good interest rate deals that I currently have and cannot replicate. I am resigned to a higher tax payment but am prepared to treat this as simply an increase in interest, for the moment.

I may move properties over time but will be cautious. The big issue for me (and most others) will be when interest rates rise so there will be a double whammy of more interest and less tax relief.

As I am committed to the private rented sector I have just bought another house through one of our companies - it is not for the faint hearted. My companies are bang up to date with documentations, accounts, etc. and I have everything to hand in my office, but dealing with this purchase has been very time consuming. The costs can be eye-watering as there is a requirement for debentures and fixed/floating charges. The directors have had to give personal guarantees (and be individually represented) over and above the charges on the properties. Our situation is complicated by loans from other lenders who also have fixed and floating charges (and want paying for sharing them).

I have run property companies for nearly twenty years so have some experience but going down the incorporated route will not suit everyone. It is important to establish the legal requirements as well as those of the lenders, and also the costs, before diving headlong into incorporation.

Regards

Graham

colin chapman

10:54 AM, 24th February 2017
About 2 years ago

Reply to the comment left by "Graham Bowcock" at "24/02/2017 - 10:44":

Many thanks for your feedback Graham. Some very sobering thoughts especially around the points in relation to costs and guarantees. Like you, up until now, I have taken the view that this will be an additional cost to borrowing, but I am very conscious of the 'double whammy' when rates rise.
I will certainly be continuing to invest but my investment vehicle will no doubt have to change as it has done for many others.
Many thanks again

Sam Addison

11:54 AM, 24th February 2017
About 2 years ago

Depending on the size of your portfolio and future plans I would definitely recommend getting advice, probably from Mark (he is probably better informed than most accountants in this situation).
I have just set up my first limited company. It took me 24 hrs and cost £12. If you are wanting a mortgage through the company it probably needs to be a 'Special Purpose Vehicle' which is just jargon for a limited company which is only allowed to work in real estate by virtue of its SIC codes. However, because I also have my wife as shareholder and director, it is taking me a month to get a bank account set up for the business. Had I set up the company in my name only the bank account would have taken only a few days. I could then have added my wife as director and shareholder later.
Finally, I think I saw somewhere that there may be a problem if you are running a business and only incorporate some of the work rather than all of it.

Graham Bowcock

13:25 PM, 24th February 2017
About 2 years ago

Reply to the comment left by "Sam Addison" at "24/02/2017 - 11:54":

Sam

There is no restriction on running a limited company (or several) whilst also being a sole trader or member of a partnership. It is quite common. What you must never do, however, is muddle them up or get confused. As a company director you have a salary (PAYE), as a shareholder you take a dividend and as a sole trader or partner you take a profit. All income and expenditure must be allocated correctly. If a house belongs to a limited company then only that company can receive the rent and bear the costs, not the directors or shareholders personally.

Believe me people do get confused by this and often fail to appreciate that sometimes money is not "theirs".

Graham

Mark Alexander

14:01 PM, 24th February 2017
About 2 years ago

Reply to the comment left by "Sam Addison" at "24/02/2017 - 11:54":

Thank you for that endorsement Sam 🙂

With 30 years of experience in property, finance, tax and law I am very familiar with the workings of accountants. I am also married to one!

My role doesn't compete with accountants, it compliments what they do.

Most accountants deal with historic problems as they are presented to them. They are rarely forward thinking in the same way as I am. Also, their advice tends to be somewhat academic whereas the recommendatios I make are practical and experience based, i.e. I am a landlord and I have researched and implemented the financial strategies I recommend in my own business.

I engage the services of both accountants and lawyers myself to implement my strategies. This also gives me the benefit of two additional levels of protection.

So far this year I have averaged around one tax consultation a day and always prepare a detailed written report for my clients to discuss with their existing professional advisers. I am now getting referrals from the professional advisers whose clients I consulted with earlier this year.
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