Buy to let investors and the budget changes.

Buy to let investors and the budget changes.

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Much publicity has been given in the press about the adverse effect of the recent budget changes and the prospect of increased taxes on landlords in the coming years.

One obvious solution for the 'serious' investor could be as has been suggested is to move the properties to a limited company. Continue to get full tax relief on interest payments and pay tax at 20% going down to 18%. win win!

Keep reading the major drawbacks. CGT to pay based on market value and SDLT is also applicable. As far as I am aware, CGT could be avoided by making a s162 hold over election. This would save/delay the investor a significant amount in tax and not to mention the cash flow benefit. No doubt there could be some SDLT strategies.

This s such an important option and am just wonder why I have not seen any articles, mentioning the s162 hold over relief. Have I missed or not understanding something?

Replies (6)

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paddle steamer
By DJKL
27th Aug 2015 21:15

S162, No Free Lunch

S162 in tricky re investment property. To hope to succeed it has to be the transfer of a business, this is not simply holding a BTL property, see HMRC guidance

 http://www.hmrc.gov.uk/manuals/cgmanual/cg65715.htm

"The meaning of ‘business’ in the context of incorporation relief itself was considered by the Upper Tribunal in the case of Ramsay v HMRC [2013] UKUT 0236 (UTT). That decision confirms that where the Courts have considered the words elsewhere the particular context of the legislation involved often restricted the meaning compared with the less restricted use for incorporation relief. The First Tier Tribunal had misdirected itself by relying too much on such cases.

The Ramsay case endorsed the approach in American Leaf Tobacco set out above, confirming that for there to be a business for incorporation relief there has to be “activity” and that just a modest degree of activity would not suffice. It also shows us that it is the quantity not the quality of the activity that is important.

The First Tier Tribunal found against Mrs Ramsay partly because it considered that the activities she undertook in relation to her property were “normal and incidental to the owning of an investment property”. That was not the correct test in this context - it was agreed that Mrs Ramsay had devoted a considerable part of her week to managing, maintaining and planning the development of a large property which was divided into several apartments. She had passed the threshold to be considered in business because of the quantity of the activity involved."

In addition depending on the pregnant gain and its quantum compared with the equity in the property to be transferred there may not be sufficient equity to mop up the gain.

If say the property has a gain of £50,000 is worth £80,000 and has a loan of £50,000 when passing to the company, then £50,000 of consideration has to be taken as cash (to repay old loan) so only £30,000 of new shares can be issued. As shares to be issued are £30,000 the maximum gain that might be relieved is £30,000, and £20,000 will fall in to charge.

This will likely not be an issue if new increased borrowings have not been secured against the property over the period of ownership, but if they have s162 may not deal with the problem even if the s162 conditions re business can be met.

I understand it may be possible re portfolio positions, where there is a great deal of management activity re the portfolio, to argue it is a business, but in most situations s162 will not be capable of giving relief as there is not a business.

I suspect the foregoing is why you have not heard that much re the idea.

ps. ICAEW have a better case summary here: http://www.ion.icaew.com/TaxFaculty/post/Rental-properties---a-business-...

p.p.s Tax Journal has a summary that is worth a read; http://www.taxjournal.com/tj/articles/incorporation-buy-let-business-100...

 

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avatar
By Cloudcounter
27th Aug 2015 21:31

Tax relief on interest

Transfer to a limited company and get full tax relief on interest at 20%

Or hold the property as an individual and get tax relief at,er, 20%

Tough call

Thanks (1)
Replying to tom123:
avatar
By Mr_awol
28th Aug 2015 09:12

20% - or not

Cloudcounter wrote:

Transfer to a limited company and get full tax relief on interest at 20%

Or hold the property as an individual and get tax relief at,er, 20%

Tough call

Unless they pay tax at 40 or 45 per cent of course (under coming changes).......

Thanks (0)
By jon_griffey
28th Aug 2015 10:10

Long term is more important

You need to look at the long term picture.

The property will need to come out of the company one day at which point the capital gain arises, and a further round of tax is paid on extracting the funds as a dividend/gain.

There is also no CGT uplift on death and no PPR exemption to play with.

As property investment is a long term game, a company vehicle is more of a hostage to changes in the taxation regime.  Who would have thought we would have this new dividend surcharge?  How will ATED evolve?  Will Prime Minister Corbyn leave corporation tax at 18%?

 

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Replying to sanjarkhan:
By Tim Vane
28th Aug 2015 10:15

Tax rates

jon_griffey wrote:

Will Prime Minister Corbyn leave corporation tax at 18%?

And maybe he'll have different income tax rates for men and women?

Thanks (4)
Replying to sanjarkhan:
paddle steamer
By DJKL
28th Aug 2015 12:07

The other side of the coin

jon_griffey wrote:

You need to look at the long term picture.

The property will need to come out of the company one day at which point the capital gain arises, and a further round of tax is paid on extracting the funds as a dividend/gain.

There is also no CGT uplift on death and no PPR exemption to play with.

As property investment is a long term game, a company vehicle is more of a hostage to changes in the taxation regime.  Who would have thought we would have this new dividend surcharge?  How will ATED evolve?  Will Prime Minister Corbyn leave corporation tax at 18%?

 

But if say this is an inter generational long term view, and the property does not need sold, then the property does not always need to come out of the company. Also indexation is a great assist if that particular property is to be sold but say something else acquired.

Re death the shares in the Limited do uplift re CGT and a shareholding in a property company holding an investment property tends to be at a lower figure for IHT than if the asset were held personally, especially re fragmented holdings amongst the family.

We have been selling out flats over the last two/three years which we built in the 1990's , some owned via partnerships with individuals as partners, some via mixed partnership where significant parts of the gains accrue to a family limited company; guess which tax has been the most painful, yes, that which arises to the individuals , the gains ascribing to the Limited are muted due to an average indexation uplift of just over 50% re attributable costs.

Fully appreciate your points if extraction of funds from the company is required/desired, but as people do tend to save throughout their life to provide them with a living when retired, there is a place for the eternal family company in such planning especially if shareholdings can be spread amongst the family at the outset.

Thanks (1)