15:10 PM, 21st November 2015, About 6 years ago 2
I was horrified to read a prediction on the highly credible Accounting Web that s162 tax relief used to mitigate CGT when incorporating a property letting businesses could be a victim of George Osborne’s Autumn statement next Wednesday (25th November).
If the Chancellor does make such an announcement those landlords currently looking to incorporate can but hope the changes will only become effective at a later date in order to allow time to complete.
When building a portfolio, profit is often retained for reinvestment into buying more property or paying down debt. However, these profits are taxed heavily for individuals. Companies only pay 20% and this tax rate will reduce to just 18% by 2020.
Companies are not affected by restrictions on finance cost relief.
Liabilities are limited to the value of the company. Mortgage lenders often require personal guarantees but there are many other liabilities that are ring fenced as a result of incorporation.
Ability to raise funding by adding new shareholders.
Ability to make pension contributions.
There are many more!
The relief is available to businesses generally. The widely accepted test for whether a landlord is running a business or not is whether (s)he, (or a direct employee, NOT a contracted agent), spends 20 hours or more per week running the business.
When a property portfolio is transferred to a company the CGT position is no different to selling the properties to a third party, i.e. base cost (purchase price and capitalised improvements) are deducted from the open market value of the property(ies) to establish a capital gain. This gain is then added to all other income and taxed at a rate of 18% for basic rate tax payers or 28% for higher rate tax payers.
However, as things stand at the moment, the equity in properties is converted into shares and the value of those shares can be offset against the capital gain. Therefore, if there is equal to or more equity in the portfolio portfolio than the capital gain there would be no CGT payable at all.
If your business qualifies for incorporation relief that is usually the biggest headache out of the way. However, Stamp Duty and costs of refinancing also need to be considered by property owners. If you have finance on terms organised pre-2009 you probably wouldn’t get the same deals again. However, with careful planning, the need to refinance and/or to pay Stamp Duty may be avoidable.
The cost of advice is £5,000 plus VAT if you use the structure recommended by our professional advisers. After taking advice, if you decide to proceed, there is a further £45,000 which includes the cost of implementation. However, this only becomes payable when HMRC clearance is obtained. Therefore, it becomes commercially viable to utilise the structure recommended by our professional advisers when you would save more than £50,000 + VAT in terms of avoiding Stamp Duty and the ability to retain your existing finance arrangements.
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