Tax mitigation now that the 10% Wear and Tear allowance has gone?

Hi Jim

Incorporation relief doesn't work like that.

Effectively you exchange equity for shares and offset the value of the shares created against capital gains to wash out CGT.

If your equity is less than the gain you would still have CGT to pay on what is known as "latent gains".

However, if your equity is more than your capital gain you cannot treat the surplus as a Directors loan. The only way around this would be to increase the debt of your business prior to incorporation to balance your equity and capital gain. Naturally, this would release cash. You could then loan this cash to your company post incorporation. Your company could then pay debt back down again. This would leave the company indebted to you by the amount of cash loaned to the company by the Directors.

Capitalising the value of furniture would increase your business balance sheet value but you would have to go through the convoluted process described above to get any value out of it.
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Reply to the comment left by "Mark Alexander" at "02/04/2017 - 10:10":

Hello Mark,

Thank you for the reply, I have always struggled to understand the incorporation relief and creating Directors loan account and I will read up more on that soon. The chattels of a property transaction are not part of any incorporation relief and that's why they are accounted for separately when calculating stamp duty.

I'm not sure why you can't just introduce a book value/face value for any chattels into a limited company but am I right in saying that you could loan your company £10,000 which then buys your chattels off you for £10,000 and now you have a £10,000 expense in your business which can be fully utilized against tax which means a saving in corporation tax of £2,000? You don't pay any tax on the £10,000 that you personally receive as these were your personal assets that you have sold.

As far as the sole trader landlord now having cash introduced into their lettings business, the idea should work as described in my original question.

Reply to the comment left by "Jim S" at "02/04/2017 - 11:46":

Hi Jim

Yes you could do that and it would work as you have suggested.

HOWEVER, there is a BUT, and it is a big one ....

To qualify for incorporation relief you must transfer the WHOLE "business". The only exception is cash. Chattels are very much part of the business, so if you didn't transfer those as part and parcel of the "whole business" then you would invalidate your claim for incorporation relief.
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Reply to the comment left by "Mark Alexander" at "03/04/2017 - 07:46":

Hi Mark,
I'm not so sure that I'd buy into the fact that chattels are a part of the business, at the point of incorporation these assets do not belong to the property business as they are personal assets that the sole trader landlord just lets the property use free of charge. As mentioned they are accounted for separately when calculating stamp duty.

Anyway if they are classed as part of the package for incorporation then this value still needs to be added to the property value for transfer to a limited company and so still has a tax benefit. What a great point to highlight to other landlords who are thinking of incorporating though!

Reply to the comment left by "Jim S" at "03/04/2017 - 10:16":

They are business assets, not personal assets.
That is why you have been able to claim the 10% wear and tear allowance against the business income.

Reply to the comment left by "Michael Barnes" at "03/04/2017 - 13:58":

Hello Michael,
But the "perceived carried forward writing down value" of the furniture fixtures and fittings that has not gone through it's full life cycle is still left over and not been utilized. If what you say is true and they are a business asset then this residual final book balance needs to be written off in our accounts for year end 2017. Well for the sole trader landlord anyway. Think of it this way, you have spent £20,000 buying new furniture and white goods for your portfolio of 4 top high quality lets on the 6-4-15 and you get to claim 10% of the rents of your portfolio of 4 houses which produce £60,000 per year rent so you claim £6,000 which leaves a PERCEIVED book value for the assets of £14,000 but the next financial year there is no 10% to claim surely you can now claim the full writing off balance of £14,000 as an expense.
I know it's a tricky one but clearly the landlord in this example loses out and that was not what was intended and would not have happened if the 10% of the rents had continued.
Maybe an email to the inland revenue?!

Reply to the comment left by "Jim S" at "03/04/2017 - 16:21":

It was the landlord's decision to take the 10% W&T allowance rather than to claim the actual cost.

Presumably the W&T allowance was claimed for the previous years and that more than covered the purchase costs?

The W&T allowance was not intended to cover the original purchase price of the assets, but to cover their subsequent replacement or repair (or decrease in value). I guess (but do not know) that the allowance was intended for people letting out their home for a year or two whilst they worked elsewhere (as it made calculation easy), not for long-term lets as a business.

If your lettings business ends, then the furnishings will be sold, so you will recoup some of that money.

You never have been able to claim for the initial purchase of an item in a residential let (with few exceptions), so you are in no worse a position than someone who claims on renewals; in fact you are in a better position because you have claimed £6000 in addition to the full replacement cost that can be claimed when next replaced.