Incorporation of Buy to Lets

That's a really good idea. As then they'll (the company) get tax relief at 19% on loan interest instead of the 20% income tax.

Plus loads more CGT on sale. Cool idea.

Yes they would get full relief on mortgage payments in the LTD company assuming they can get one as they are not so easily available.

Why would they not have to pay the 3% second home Stamp Duty, even the first property bought by a company has to pay it?

Getting those properties into the company the first place may well mean paying Stamp Duty as well as CGT as they don't sound likely to get incorporation relief based on 3 standard BTL properties.

Not necessarily a good idea

But one point - yes it's true that the company will get relief at a lower rate than an individual - but it is likely to also pay tax at a lower rate on the profits.

The key tends to be their long term plans both re the properties and their future assets- good crystal balls are hard to obtain.

Locking into a company may be a good idea if the individual will never need the capital value of the properties (once the loans all repaid) and there is never going to be a need to extract significant funds. There may also be scope for IHT reduction using a company's shares, but one has to be very confident that the tax and other legislative framework will remain pretty static over the years, and that is a big assumption.

One also has to have a crystal ball re house price inflation against general inflation, the company's indexation relief should not be ignored.

And then one has compliance costs and hassles, things that the individuals take in their stride at the start could be very different in say 20 years time as they get older.

And if multiple offspring who want to each go their own way then splitting out the assets to them from a company shell may be a tad more tricky- I currently have one prospective client in this position with substantial properties looking to use the company reorganisation legislation but still each will be left with the assets ring fenced within their distinct company-maybe the children might prefer being able to realise the investment to fund a bigger family house.

I would be loathe to move to incorporation with all its costs without a very detailed evaluation of the costs/benefits, and given the current political will to help new  owner /occupiers, and the ever changing legislative landscape, I would be cautious of making assumptions regarding the continuance of existing legislation and reliefs.

For all we know someone is right now beavering away in the Treasury with ideas of creating certain types of residential property investment companies that can receive tax relief re interest paid (social purpose) and others that cannot, the current move toward curtailing interest relief may be extended (why even 20%) and interest might in time be fully disallowed both for individuals and for private companies. Nobody knows how far the anti BTL legislation will go but at present we can detect the direction of travel, so caveat emptor.

Depends

From a tax point of view it will depend on how much profits they will generate, and the likelihood of the property prices increasing.

Under a ltd company, corporation tax will be paid at 20% on any profits, but then to get their hands on the money, i.e through dividends they will be paying 7.5% or 32.5% depending on their level of income and whether or not they would receive a salary.

If unincorporated, your clients would just pay 20% or 40% income tax and obviously no national insurance as it's rental income.

Also, a ltd would pay 20% (plus tax on dividends) on any profits from the sale, but an individual would pay either 18% or 28% AFTER their annual capital gains allowance of £11,000.

So I would say no to incorporation based on the information above.

Yes but...

The 7.5%/32.5%/38.1% is only payable on the profits distributed which cannot exceed 80% (when the CT rate is 20%).

So company makes £100. It pays CT of £20, and only has £80 to distribute. That £80 might be taxed at 0% (£0), 7.5% (£6), 32.5% (£26), or 38.1% (£30).

That means the total tax on the £100 is either £20 (20%), £26 (26%), £46 (46%) or £50 (50%) compared with personal rates of 20%, 40% and 45%. Once you take into account the savings by getting full relief for the interest payments that differential will be substantially eroded.

That assumes that all of the profits are distributed though, and often profits are reinvested in acquiring further properties. In that situation, and where there is no intention of selling properties in the short to medium term, holding the properties through a company may very well be advantageous.

As ever, what people here seem to have difficulty understanding is that there is no one size fits all approach, and professional advice is best left to professionals.

Companies do pay the 3%, and they don't need a first home to do so.

Incorporation relief may not be available in the circumstances you describe (3 existing buy to lets).

Those are the issues that need to be resolved.

Your solicitor doesn't know what he is doing, then

A company buying UK residential property costing £40k or more, for any purpose, will have to pay the additional SDLT/LBTT charge. With possible exception of a single purchase of 6 or more dwellings.

glad youre back to square one
Stay there!

There are a number of issues I recommend that you consider here:

If your clients actively manage their property portfolio as a business then incorporation relief should apply. Consider the activities undertaken versus the decision in Elizabeth Moyne Ramsay v HMRC [2013] UKTT 0226. A non-statutory clearance application is possible in cases where there is uncertainty.

Not only can capital gains be deferred but the company will also get a 'step up' of the CGT base cost of the properties to market value at the date of incorporation.

Care needs to be taken where borrowing exceeds the original cost of the properties as the net asset value of the business transferring needs to be greater than the aggregate capital gains for full deferral.

If you can present a case that the property business is a partnership then there should be no liability to SDLT as Paras 18-20 Sch 15 FA 2003 will apply.

Finally, and most importantly, you will need to consider the amount of income your clients need for personal use. As many people have mentioned there is no restriction of tax relief on finance costs within a company but the overall cash requirements of your clients will be paramount in deciding whether incorporation is beneficial or not.

Hope this is of help.