BUSINESS hallmarks – how many does yours have?

BUSINESS hallmarks – how many does yours have?

20:57 PM, 25th July 2017, About 4 years ago 5

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If you are hoping to incorporate your rental property portfolio you will probably want to be certain that you can roll capital gains in your properties into shares in the company you are incorporating into. To achieve this you will need to qualify for relief under s162 TCGA 1992. The main qualifying criteria for this relief is that HMRC accept that you are running a business.

How many of these questions would you feel comfortable answering if an HMRC inspector was interviewing you to establish whether or not you are running a business:-

What is your business name?

Does your business have its own Unique Tax Reference number “UTR”?

Do you have a bank account in your business name?

Do you have business letterheads?

Do you have a business telephone number?

Does your business have a website?

Do you have a business email address?

Does your business have an office?

Do you have business cards?

Does your business have any employees?

Does your business have a balance sheet produced regularly?

Does your business produce management accounts?

You don’t have to have all of these things in place to qualify for incorporation relief but if you have none of them HMRC are more likely to consider that you are curating an investment portfolio than running a property rental business.

I’m not saying they are right but perceptions could prove to be important if you are hoping to incorporate your rental property portfolio and claim incorporation relief to roll capital gains in your properties into shares in the company you are incorporating into.

If you are considering incorporation or you need guidance on the optimal tax structure for your business please click on the button below.

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by Linda Price

15:40 PM, 30th July 2017, About 4 years ago

Our biggest problem was that we had already set up a limited company about 8 yrs ago to manage the sole trader company to help with our tax position, and moved all the employees over when we incorporated, but the properties are still mainly under our personal names (now officially a partnership) any way out of this one?

by Mark Alexander

15:54 PM, 30th July 2017, About 4 years ago

Reply to the comment left by "Linda Price" at "30/07/2017" rel="nofollow">">30/07/2017 - 15:40":

You are perfectly entitled to have your properties managed by a Limited Company but if the company is owned by the partners and has charged the partnership more than 15% of gross rents that may well fall foul of alienation of income and you may well receive a personal demand from HMRC as on the basis that 85% of the rental income had accrued to the partnership or the individuals within it as opposed to the company. You would be taxed on the difference between the two tax rates and fines on top. There is no way out of that, save to sue your professional advisers for professional negligence for not pointing this out to you.

Moving forwards, you could file form SA402 to appoint the company as a partner of the partnership and then look to incorporate post April 2018. This is NOT a fix for any historic alienation of income issues but you MIGHT get lucky on that if HMRC doesn't pick up on it.

Either way, you have a major problem if HMRC pick up on alienation of income.

by Linda Price

17:06 PM, 30th July 2017, About 4 years ago

Reply to the comment left by "Mark Alexander" at "<a href="30/07/2017" rel="nofollow">">30/07/2017 - 15:54":
Thanks for your comments Mark, but I'm not quite sure I understand what you're saying. The company would charge us between 10 and 12% of rental incomes for management, then there would be a charge for any works done. The company paid for all staff, office and vehicle costs, then charge us that amount plus a small profit, and we would pay for all materials, to keep us under the VAT threshold. We then paid tax on what was left under self assessment, but including the part time wages we take from the company (minimal amount).
We are currently putting all the properties into joint names to run as a partnership going forward while we are having them all remortgaged. So I'm wondering if I've screwed everything up by doing this?
We have a company name that we've always used (and just put Ltd on the end for Ltd company use), and a company email address, but hardly ever used as we only deal with ourselves and our own properties. Despite saying we're retired, I still spend a lot of time running everything :-/
And sadly, no one to blame but myself - just wondering if we would be able to incorporate the property side?

by Mark Alexander

17:28 PM, 30th July 2017, About 4 years ago

Reply to the comment left by "Linda Price" at "30/07/2017 - 17:06":

Thank you for the additional explanations Linda. I'm not certain that everything you've been doing so far would withstand an HMRC investigation but you are where you are.

To claim incorporation relief you must incorporate the 'whole business' and HMRC must accept that you are a business. Under your current structure they would argue that the partnership is a passive investment. Making the management company a partner, as per my previous comment, resolves that problem.

For further advice please book a Consultation via our tax page. A public forum is not the right place for either of us to be having these discussions.

by Mark Alexander

18:42 PM, 30th July 2017, About 4 years ago

Reply to the comment left by "Linda Price" at "30/07/2017" rel="nofollow">">30/07/2017 - 17:06":

PS - remortgaging is completely unnecessary and the costs can be horrendous whilst leaving you on inferior terms to those on the mortgages you have replaced.

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