Is Incorporation Really the Answer?

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Recent changes in regulations, and in particular the March 2016 Budget announcements have changed the tax position of landlords significantly.

Shelter from the income tax implications of these rulings has increased the appeal of a company as a structure for ownership of residential property.  Moreover, changes in corporation and capital gains tax have lessened some of the former drawbacks to company ownership.

Tax on gains made through property held in a company.

The, so called, double tax charge is a reason that companies have not historically been a popular with UK landlords.  However, the reduction in both the main rate of both corporation tax and capital gains tax have reduced this classic drawback of the double tax charge.

When a property is disposed of, usually either sold or transferred as a gift, the company realises a gain or loss.  If there has been any overall increase in value this gain will be subject to corporation tax.  The rate of corporation tax for 2016/17 is 20%, however it is due to reduce to 19% in 2017 and again to 17% in 2020.  On withdrawal of the proceeds by the owners any increase in value of the property is also subject to tax.  Income tax would apply if the funds are withdrawn as dividend, but given the tax implications, it would be more prudent to wind the company up and treat the distribution as a capital gain.  The rate of capital gains tax is currently 20%.  Since, this gain will be on proceeds after deduction of corporation tax the overall gain could be said to be 36% (i.e. 20%, plus 80% of 20%.)  This combined rate will reduce to approximately 33.6% by 2020.  This compares to a rate of 28% for gains on residential property held privately.

The percentages above are broad estimates to show a comparison between the two forms of ownership.  The actual rate would be lower for a company due to indexation allowance and lower for an individual due to the annual allowance.

In general, capital gains tax will be greater for property held in a company.  However, careful planning could reduce this tax.  This planning could include:

  Disposal of the property while not UK resident;

  Appointment of shares to family members taxed at lower rate; and

  Investment of proceeds in a pension.

Residential property cannot be owned by a pension.  Therefore, company ownership can be used to achieve market exposure and subsequent pension contributions to secure tax advantage.

Tax on rental profits achieved through company owned property

Until 6 April 2017, it will still be possible to deduct mortgage interest from rental profits subject to income tax.  However, from 2017/18, the percentage interest that can be deducted from taxable profits will taper, so that by 6 April 2020 no interest will be tax deductible.  In its place, a tax reducer equal to 20% will provide a form of relief.  However, a higher rate taxpayer currently finding 40% tax relief on interest payment will by 2020 obtain only 20% relief.

There is currently no restriction on the amount of interest that can be deducted from profits chargeable to corporation tax.  For a higher rate taxpayer, tax payable on profits for a mortgaged property could be considerably lower if owned through a company.

A taxpayer can obtain relief from general income on a loan made to a close company.  This will provide:

  Full tax relief for mortgage interest irrespective of the profitability of the property.  For private landlords, rental losses can only be used to reduce future rental profits.

  Greater profits can accumulate in the company, either to be paid to shareholders taxed at a lower rate, or to be accumulated and withdrawn as capital on winding up.  The ‘capitalisation’ of rental profits could confer considerable tax saving as explained later in this article.

  More favourable loan terms.  Companies are inherently riskier to a creditor, and in practice corporate loans cannot be secured at all or for the same value.

For individuals earning over £200,000 a cap may apply to the amount of tax relief available on interest.

From 2016/17, each person is entitled to a dividend allowance of £5,000.  This allowance is valuable to higher rate, and additional rate, taxpayers.  In effect, a husband and wife could withdraw company rental profits of up to £12,500 per year, and pay only £2,500 in tax.  This compares to tax of £5,000 on the same income if both spouses are taxed at the higher rate.

A higher rate taxpayer would suffer tax at 32.5% on dividends withdrawn over the £5,000 allowance.  Therefore, there could be a benefit to retaining funds in the company, and withdrawing the funds as capital gains when the property is eventually sold and the company is dissolved thereafter.  The combined rate of corporation tax in this case would be 36% (or lower if a tax year after 2016/17.)  This rate of tax is explained above.  By comparison, landlords subject to higher rate tax and with the property in their own name would suffer a rate of 40%.

Moreover, the capital gains tax element would not be payable until the company is eventually dissolved.  Therefore, retained funds could be used, for instance, to repay a company mortgage or to invest in further property.

Non-residents

Since 6 April 2015, all non-residents have become potentially liable to capital gains tax on their UK rental property.  Depending on the prevailing tax regime in the country of residence, tax savings can be achieved through company ownership.  This is because a non-resident is not subject to UK tax on the disposal of a share.  Dividends are disregarded income for an individual who is not UK resident.  It is therefore only the corporation tax element of the gain which would be subject to UK tax.  The timing of disposal of rental property could form a key part of retirement planning where the landlord’s intention is to emigrate in the future.

Inheritance tax

Inheritance tax is charged on the value of a person’s estate, which includes any gifts made in the seven years prior to death.  Therefore, the transfer of property in seven years prior to death could be subject to both inheritance tax and capital gains tax.

Probate value determines the gain or loss made by the beneficiary on disposal of the inherited property.  Thus, death creates a ‘capital gains tax free’ uplift in value for property.  Given that the proceeds from a property sale could form part of the estate, a plan to simply hold property until death can be tax efficient.

Property owned in a company will not enjoy the same tax benefit.  On a future disposal of the shares by the beneficiary any capital gains tax would be calculated by reference to the market value of the property when inherited.  To the extent, capital gains tax is avoided in the same way as for property held privately.  However, the overall gain on company property has two elements.  The value of the property for determining gain subject to corporation tax will still be its original cost, regardless of any changes to the shareholders.

Company ownership is likely to be more tax efficient where it is not the intention to hold the property for a lifetime.

By the same token, if structured carefully a company can become a useful mechanism in inheritance tax planning.

Rental property can form a significant part of a person’s wealth.  A company can facilitate the transfer of a property, and the income which it generates, to various children, grandchildren and other beneficiaries over time.  This way the family wealth can be imparted in a controlled and gradual manner.  This is the kind of arrangement that would previously have been performed by a trust.  However, it is probable that the rates of tax on a trust will not be as favourable.

Recommendations

The tax advantage gained from the use of a company is more likely to be realised on properties that produce high yields rather than capital growth.  The higher the mortgage cost the more suited the investment to corporate ownership.

For couples, a company could allow for double the dividend allowance.  The use of an alphabet structure could facilitate transfer of income to the spouse taxed at the lower marginal rate.  By contrast, a married couple are taxed on rental income in the same proportion as they own the property, regardless of the way this income is paid.

It will rarely be prudent to transfer an existing rental property into a company.  The purchase of additional residential property is subject to a further stamp duty of 3%.  The transfer would be treated as a disposal for capital gains tax purposes.  Therefore, an increase in value from the date the property was acquired to the date that it is transferred into a company would be subject to capital gains tax.  The rate of tax is currently 28%.

The government could legislate to block any means of avoiding tax through company ownership.  An entire disruption is unlikely given the various areas of tax law that would have to be simultaneously changed.  Nonetheless, any arrangements to save tax should be regularly reviewed in response to changes in regulation, and a clear exit strategy put in place.

Ray Coman, FCCA, CTA

Director

https://comanandco.co.uk/

Watch our one minute video here: https://www.youtube.com/watch?v=Haxo2pzDRfs

… LandlordZONE.

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TPO and CTSI launch joint letting fees campaign

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National campaign kicks off in Swansea and Dorset to improve industry compliance and raise awareness among consumers so more landlords and tenants ask about fees when they shop for an agent. The Property Ombudsman Scheme (TPO) has launched a new national campaign with the Chartered Trading Standards Institute (CTSI) to tackle lettings agents that are… Read more

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Fire Safety Tips For Landlords

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Being a landlord is a lot more than just collecting the rent every month, as I’m sure you already know. There are many responsibilities which go hand-in-hand.

There are lots of rules and regulations which are in place to protect your investment, but more importantly, they also help to keep your tenants as safe as possible.

A responsible landlord who fulfils all their obligations can sleep easy at night, knowing they have everything covered.

People living in rented accommodation are seven times more likely to have a fire than those living in homes they own.

Thankfully, in England and Wales, the Regulatory Reform (Fire Safety) Order 2005 is in place to keep everyone safe. And likewise, Scotland enforces the Fire (Scotland) Act 2005 and in Northern Ireland The Fire Safety Regulations (Northern Ireland) 2010.

In all honesty, they’re a bit complicated. It can be really hard trying to get your head around things and staying on top of everything. So to help you out, Fire Protection Online has put together some tips to make it a little easier.

Detecting A Threat

Everyone is aware of how vital smoke alarms are in keeping people safe. After all, you’re four times more likely to die in a fire if you don’t have a working smoke alarm.

So despite them sometimes being an annoyance when you burn the bacon, or when they tell you the battery needs replacing, they really are worth it.

They provide an early warning of a potential threat. This can be what prevents a small fire from escalating, and allows everyone to make a swift and safe exit.

And as a bare minimum, you must fit at least one smoke alarm on every floor of any rented home. But for a better level of protection, install smoke alarms in the rooms which people spend most of their time, such as living rooms and bedrooms.

It is also the law to install carbon monoxide alarms in rooms containing a solid fuel appliance, like a fireplace.

For better protection, it’s advisable also to install CO alarms in rooms containing a gas appliance, like a boiler or cooker, and additionally in areas where residents sleep.

Even if the home has no gas or solid fuel appliances, they’re always beneficial. It’s not unknown for carbon monoxide to seep in from neighbouring homes which have CO leaks.

A good rule of thumb is to give tenants the same level of fire protection you would expect in your own home.

There are many different solutions which exist for landlords. For example, alarms with long-life batteries are harder to tamper with and have up to a 10-year guarantee, and wireless alarms mean there is no excuse for an occupant not to hear a smoke alarm.

Fire-Fighting Equipment

Each floor of an HMO must have a fire extinguisher in the communal areas. Other than that, it is not generally a requirement in rented accommodation.

That doesn’t mean you shouldn’t provide any, however.

Providing tenants with fire blankets fixed to the wall gives them the resources to be able to prevent a small kitchen fire taking hold. And after all, that also reduces the damage caused to your property.

A powder fire extinguisher is also a good multipurpose extinguisher which is suitable for many types of fire. To enable tenants to stay safe, it may also be beneficial to provide them with basic training in its operation when they move it.

But it is vital to remember that with any fire extinguisher you provide, it needs annual servicing, carried out by a trained technician.

Fire Precautions

In an HMO property, you must have a fire risk assessment completed and in writing. They are also a good idea in a standard rental property.

If you feel competent enough, you can do this yourself. There are plenty of guides online to help you through the process.

Alternatively, it is sometimes better to get an outsider’s unbiased perspective. So you may also want to look into having a professional fire risk assessment completed.

Its purpose is to identify fire hazards and reduce those risks as much as practically possible. Plus it will also consider the needs of people who may find themselves caught up in a fire in the property.

For example, it is likely that you will need to install self-closing fire doors with intumescent seals. These will prevent a fire from spreading and allow for the evacuation route to remain clear.

You may also need to provide an alternative exit route, particularly in HMOs which are not on the ground floor.

You are also required to ensure gas and electrical appliances you supply are properly installed, maintained and annually serviced. These need to be carried out by qualified professionals.

By looking after gas appliances, you are reducing the likelihood of CO poisoning. And with PAT testing you’re making sure electrical equipment is not going to cause harm.

It is also worth checking that the fuse boxes have RCD protection. These prevent electrical shocks and reduce the risk of electrical fires.

And Finally

Any furnishings you provide (except carpets and curtains) need to be made of fire-resistant materials.

These furnishings come with a label which confirms this. The Furniture and Furnishings Act 1998 states that you must not remove the label.

Plus, you may want to consider providing tenants with basic fire prevention advice so they can help themselves.

As the property owner, you are the person responsible for ensuring everything is as it should be. Even if you delegate these duties to your letting agent, it is still the landlord who is ultimately responsible.

The courts take failure to comply with the fire safety regulations very seriously. In fact, in 2012 Chester Crown Court fined a landlord £45,000 for eleven fire safety offences. These included broken smoke alarms and combustible materials in corridors.

So it benefits everyone to ensure your rental properties are complying fully with the regulations. Having a safe place to live is one of the most important things in life, so ensure your tenants have such a place which they can call home.

For more information about fire safety in rented accommodation, or in general, the Fire Protection Online website is packed full of info.

Article Courtesy of: www.fireprotectiononline.co.uk

… LandlordZONE.

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Using a Property Company

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Several tax changes announced over the last year or so have left residential landlords reeling from the Government’s concerted attack on the private rented sector. One key question keeps emerging: ‘Should I be using a property company?’ Carl Bayley, author of ‘How to Save Property Tax’ and ‘Using a Property Company to Save Tax’, takes […]

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Catch all the latest private rented sector news, views and developments

admin    Uncategorized     agents

As ever, it has been a busy year for the Private Rented Sector. We’ve seen tax changes, the further role out of licensing, proposed new rules under the Housing & Planning Bill, new rules in relation to Right to Rent under the Immigration Act and much more, not to mention Britain’s exit from the European Union.

Come along to the final Landlord & Letting Show of 2016, taking place at the Ricoh Arena in Coventry on Wednesday 30th November, to discover what this year’s developments already – or are likely to – signify for the industry and also find out what else is in store as we head into 2017!

You can get top tips and sage advice from industry professionals in the seminars and workshops, question the panelists during their discussion on one of the latest hot topics and pick up some great product and service deals, offers, discounts and more in the exhibition!

Visit the website at www.landlordshow.info to find out more and book your complimentary tickets.

… LandlordZONE.

View Full Article: Catch all the latest private rented sector news, views and developments

What are my options for Let to Buy?

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I read this wonderful website and it’s so helpful half of my knowledge as landlord is coming from here. So thank you to all of who contribute to this place. I need urged advice and opinion from everyone regarding a situation in which I am at this point. I have two properties one BTL and… Read more

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How to approach replacing a set of something when only one has been damaged?

admin    Uncategorized     agents

The question arises in relation to pet damage caused to a kitchen unit door. The property was occupied as a HMO which a group of friends occupied. Two of them jointly requested permission to ‘get a dog’ – which resulted in two puppies (from the same litter) being brought back to the property. Unfortunately the… Read more

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Lord Flight condemns buy-to-let tax

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Following George Osborne’s swinging tax reforms, which will undoubtedly have a big impact on buy-to-let landlords; a senior Conservative Peer has reacted with accusations that the former Chancellor has exacerbated the housing crisis through his “cash grab” on landlords. Lord Flight, who previously served as Shadow Chief Secretary to the Treasury, has used an article […]

… LandlordZONE.

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