Incorporation For Landlords In Scotland Is Becoming Increasingly AffordableMake Text Bigger
The Scottish Association of Landlords recently reported that Kevin Stewart MSP has written to the chief secretary to the UK treasury to express concerns about the impact of the “section 24” tax change, which reduces landlords’ tax relief on mortgage/finance interest.
In his letter he wrote:
“…in recent engagement with private landlords in Scotland, many have highlighted to me that this change could result in them leaving the sector. Such concerns were evident at the recent (SAL) Scottish National Landlord Day conference, where landlords highlighted it as their biggest concern within the sector at the present time…”
The letter goes on to express concerns that a similar tax change which was introduced in Ireland in 2009 led to a sharp rise in rents as landlords attempted to offset their increased tax bill.
As this element of income tax legislation is reserved to the UK Government, the Scottish Government does not have powers to reverse the tax change. However, it is encouraging to know that the housing minister is listening to the concerns of Scottish landlords and taking action to pass their concerns on to the relevant decision makers.
An article posted on the Facebook page of “Axe The Tenant Tax” resulted in some interesting comments from landlords as follows:-
However, until now, the costs associated with incorporation for landlords in Scotland, “Shape Shifting” as James Fraser puts it, has been prohibitively expensive in many cases. The solution to this problem could be “SISS”.
SISS is an abbreviation for Substantial Incorporation Strategy Scotland.
Legislation already exists to help landlords running business partnerships to transfer the business to a company structure without paying LBTT, and to roll capital gains into shares. SISS dovetails with these arrangements to enable the transactions to conclude without immediately needing to refinance.
Where existing mortgage terms are particularly competitive, and/or when the costs typically associated with refinancing are prohibitively expensive, that is when the SISS structure comes into its own.
SISS is the sister of BICT. They are recognisably from the same parents, but there are major differences nonetheless. For example, beneficial interest does not exist in Scotland, hence a different approach to the problem of incorporating without refinancing is necessary.
SISS is not designed to avoid or defer tax. In fact, it does quite the opposite in that it triggers taxable events early and then utilises reliefs to mitigate the tax which would otherwise fall due.
LBTT anti avoidance legislation (LBTT is the Scottish equivalent to Stamp Duty) has provisions to say that where a sale is “substantially” completed it is deemed to have completed after 30 days whether the conveyance has been legally completed and registered or not. This is a key factor for this strategy.
SISS involves substantially completing the sale of the ‘whole business’ of a rental property partnership and claiming rollover incorporation relief under TCGA92/s162.
SISS “substantially” completes the transfer of a rental property business whilst deferring the requirement to refinance until the end of the existing mortgage contract term, or at the behest of the company to which the business is being transferred into. The business sale transaction is “substantially” concluded when the net equity in the business assets is exchanged for share capital, which in turns absorbs capital gains in the assets of the property rental business. From this point forwards the business is conducted within the company. In regards to the properties within the business, missives are exchanged, but the contract notes that the completion of the conveyance will not occur until the day before the expiry of the existing mortgage term, or at the behest of the company to which the business is being transferred, whichever is the sooner.
SISS is quite the opposite of avoidance from a tax perspective. We are actually using anti avoidance legislation to hasten the deemed completion of a business sale and trigger the LBTT return. However, just as England and Wales have legislation which treats Partnerships differently when they become companies, so does the Scottish LBTT system – see http://www.legislation.gov.uk/asp/2013/11/schedule/17/enacted
In many cases, the LBTT payable when a partnership is transferred to a company under the same ownership is £nil.
Counsel’s opinion from a leading Scottish tax barrister has been obtained in regards to the above and will be shared with paying clients of Property118 Limited. The Scottish conveyancing firm used to complete the transactions and file the LBTT returns have also completed their own ‘due diligence’ in regards to this structure.
How it works
If SISS is the recommended tax planning strategy following a private consultation with Property118 (completed online and over the telephone), a bespoke report and recommendations will be produced.
If the owners of the business wish to proceed “in-principle” the report and recommendations (together with counsel’s opinion on the entire structure and associated tax legislation including DOTAS and GAAR Scotland) will be sent to an appropriately qualified and insured to an appropriately qualified Scottish accountancy firm of the landlords chosing for a second opinion. If that opinion matches the Property118 recommendations the Scottish accountancy firm will then formally adopt the Property118 recommendations as their own professional advice, subject to the firm being appointed to deal with implementation. We have a close working relationship with an accountancy firm whose Principal is a portfolio landlord and has used the SISS strategy to incorporate her own property rental partnership business of 73 properties. We will be pleased to introduce our consultancy clients on request.
The conveyancing and the business sale agreement and associated documentation is completed via a highly reputable Scottish law firm regulated by the Law Society of Scotland.
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