Property Portfolio Incorporations
A bit of background...
Transferring a property portfolio to a Limited Company, referred to as a Property Portfolio Incorporation, has been hot topic of conversation ever since George Osbourne introduced legislation in the summer Budget of 2015.
The introduction of Section 24 took effect over a 3-year phased period and resulted in restricting finance costs for private landlords to the basic rate of tax.
Clearly for a basic rate taxpayer this has no effect, but if you are a higher rate taxpayer then it has the effect of squeezing your rental profits due to the additional taxation.
These changes sparked a substantial interest in transferring property portfolios into a Limited Company structure, where the Section 24 changes have no effect.
What are the benefits?
There are additional benefits to running your property business through a Limited Company, such as obtaining a form of limited liability, restricting profits to Corporation Tax, managing income tax liabilities, etc, and these should all be considered.
In the right circumstances, it is possible to transfer your properties to a Limited Company without triggering a Stamp Duty Land Tax or Capital Gains Tax charge.
How we can help
So, how do you know if you can incorporate your property portfolio? At Crofton Bradfield we carry out an assessment to establish if you qualify, and if you do then we will explain the benefits and drawbacks of an Incorporation.
From a tax perspective, consideration will need to be given to Capital Gain Tax and Stamp Duty Land Tax.
As an example, to obtain relief from Capital Gains Tax you will need to qualify for s162 Incorporation Relief. In short you will need to demonstrate that you operate a Property Business.
What we look at
There are indicators that we assess and while it is not necessary for all the following to apply for there to be a business, it’s fair to say that the greater number that can be met and preferably exceeded, the stronger your position will be.
Number of properties – this is often indicative, though not conclusive. Whilst 10+ properties is a good starting point fewer may still also qualify, particularly in cases of HMO’s. Quality, when assessed against the other indicators, not quantity, will prevail.
The time you spend on the rental properties – the closer to a ‘full time’ job the rental properties are, the better. In Ramsay v HMRC, 20 hours a week between husband and wife was deemed sufficient.
What activities are undertaken – more involvement in the day-to-day maintenance and administration. This does not mean that building work, for example, must be undertaken by the property owners themselves, but sourcing builders, overseeing maintenance, etc. is good. Simply outsourcing everything to a rental agent would suggest that it is not a business.
Pre-rental activity – if you have a track record of refurbishing or improving properties prior to renting, then this would indicate a business.
Property turnover – if properties within a portfolio are being regularly bought and sold to maximise rental returns.
Our assessment will consider your:
• Capital Gains Tax Position
• Stamp Duty Land Tax Position
• Level of benefit obtained by Incorporating
• Inheritance Tax Position
To discuss your own position and to establish whether you qualify with one of the team please click here to contact us, or book an appointment.
