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Rental business - any point incorporating?

Is there any potential benefit from running a rental business through a limited company?

Retired married clients have one rental property held in joint names worth approx 250,000 producing a total rental income of around 10,000. Considering buying a second property for around 150,000 with potential annual rental profit approx 8,000.

He is a higher rate tax payer (good pension) she is just above the basic rate threshold. There are no mortgages involved so no interest costs.

They have asked if there is anything to be gained from putting the properties into a Limited Company.

I have explained that transferring the first property in could lead to CGT and stamp duty on the transfer.

As there is no issue with interest tax relief I can't see any great point transferring the first property into a company or buying the second property through a company.

It seems the best advice would be for the second property to be purchased in the wife's name and the first one left where it is.

I just wonder if I am missing something.


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By Akrigg
25th Apr 2018 17:17

No - can't see any benefit in incorporating. Even if the properties were mortgaged the figures wouldn't justify it. And with 2 properties, it'd be difficult to convince HMRC that they were incorporating a business in any event.

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25th Apr 2018 17:26

Its the new black, everyone wants to do it.

Point out the CGT will be very high with CT then costs of extracting the cash.........normally does the trick.

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to ireallyshouldknowthisbut
25th Apr 2018 17:39

IFAs seem to be pushing this a lot.

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to Cheshire
25th Apr 2018 18:18

That is a fact and it has just messed up a client relationship.

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to andy.partridge
25th Apr 2018 18:26

Nothing worse than IFA's trying to do tax.

had a "financial planner" trying to plan a clients dividend strategy recently and ended a little more than stormy when I refused a 3 way conversation to 'do his tax planning' given we already do that for him as part of his package.

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to ireallyshouldknowthisbut
25th Apr 2018 18:27

It's taken me a lifetime to fully realise it but when an IFA says, 'You'd be a fool not to do it' that's the time to be on red alert. Unfortunately this has not clicked with all clients.

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25th Apr 2018 19:07

On the rental income the company pays tax at 19% and then monies distributed attract a further 7.5% or 32.5% tax. As individuals the tax on rental income would be 20% or 40%.
On capital gains the company pays tax at 19% with no CGT allowance and monies distributed attract a further 7.5% or 32.5%. As individuals the tax is 18% or 28% and you get 11,700 CGT free each.
With a company there are also the extra administrative and professional costs.
Sure IFAs know all this .. not!
Also transfers of any existing properties into the company will attract stamp duty and CGT.
Probably in this case putting the new property (even the existing one) into the basic tax rate payers name would seem best solution

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25th Apr 2018 22:24

There can be reasons to buy debt free property in a company if say children are first made the shareholders of same and higher rate tax parents lend in the funds.

The parents then over years getting repaid their loans from the net income that has been taxed at 19% with a possibility of interest if required re the loan.

Of course the same scenario can be arranged without the company shell but there is the risk the children, assessable on the rentals as individuals, themselves grow into higher rate taxpayers.

Not sure I would be that keen triggering pregnant CGT re an existing asset to be sold into the beast, but for a new purchase it relatively cheaply passes future growth in value to offspring, accordingly the whole concept ought not to be castigated out of hand.

Having said the above there are risks divesting assets where the parents may require cashflow through retirement, but putting in place a standard security might give some comfort.

On a £250,000 property with £10,000 gross a year the net post tax the company could repay, with no liability on the parents, is £8,100 p.a, this amounts to thirty years "income", as time passes the parent's estate reduces but no PETs and all property value uplift vests in the children.

The income tax saving versus the CT suffered is £2,100 per year for a HR taxpayer, so £63,000 over 30 years and possible IHT saving is £100,000 if loan fully repaid before death. This is likely far more if compared with property having been owned by parents to death and say having trebled in value over 30 years.

In effects parents offload £250k for an £8,100 annuity for thirty years.

The loan can be made impossible to call (if debt servicing maintained) thus giving some mitigation re the underlying asset having a forced sale re say future care home costs.

I am not advocating the approach however nor would I dismiss it out of turn, individual family circumstances and priorities dictate correct planning.

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By MJShone
26th Apr 2018 10:30

*you can pass the Ramsay "business" test and get no CGT going in; and
*get around the SDLT by first forming a partnership (as opposed to joint ownership); and
*the tax savings outweigh the additional running costs; and
*the client understands that the company's money is not his money;
then maybe, just maybe, it's a good idea

But incorporating is easier than disincorporating. What happens if rates etc change and the company becomes a bad idea. (Indexation used to mitigate the loss of CGT annual exemption - but that's gone now.) Remember all those plumbers who incorporated to take advantage of the 10% starting rate? Or service companies that took advantage of the transfer pricing rules, and were still marginally tax advantageous when the transfer pricing rules changed, only to flip to being tax disadvantageous when dividend rates increased?
It's not necessarily a case of "don't do it". Just make sure the client's aware of the potential pitfalls.

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