Landlord Incorporation Specialists
118.tax Landlords Tax Solutions

Landlord Incorporation Specialists

If you ever consider transferring your property rental business into a Limited Company (which all landlords absolutely should do) there are four important considerations you must not overlook:-



  • Will CGT be payable? Given that you will be selling your properties to the Limited Company, you will be crystalling your capital gains. Ordinarily, this would mean that Capital Gains Tax is due. However, in certain circumstances, ‘incorporation relief’ will enable you to roll some or all of the capital gains into shares in your Limited Company which you exchange for equity in your properties. The software mentioned above also calculates the CGT position for you.


  • Will the company need to pay Stamp Duty when the properties are transferred into it? Given that the company is essentially buying the properties from you, Stamp Duty would ordinarily apply. However, in certain circumstances, relief is available. The software mentioned above also calculates the Stamp Duty position for you.


  • Will you need to refinance? The costs of refinancing can be extremely high. Furthermore, if you are tied into mortgage deals with early repayment charges or you have particularly competitive financing terms already, it may not be economically viable for you to apply for new mortgages in the Limited Company name. However, there are legal structures available which enable you to defer new financing until it is financially viable for you, or to the end of the existing mortgage term. 


CASE STUDY


The Case Study below explains why so many property rental business owners are considering incorporation, by comparing the tax position of a private landlord vs that of a private hotelier.


Let’s assume that both businesses own assets worth £2,000,000 and have 75% LTV mortgages secured on them at an interest rate of 5%. In other words, their annual finance cost bill is £75,000.


Now let’s assume that both businesses make profits after finance costs and all other expenses of £50,000.


The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.


However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500. This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.  Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500. The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.


To summarise, the private landlord pays more nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.


HOWEVER, if both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.


There are, of course, many other reasons for private rental property businesses to consider incorporation. These might include the following:-


  • Since the Prudential Regulation Authority changed the rules on buy-to-let mortgage affordability criteria, Limited Companies can borrow significantly more than private landlords based on rental income calculations.


  • There are far more opportunities for property company owners to accrue future capital appreciation of property outside of their personal estates for inheritance tax planning purposes.


  • You may be able to structure your finances in such a way that you do not need to declare taxable dividend income.


  • If you live outside the UK the ability to be able to structure your finances to enable you to withdraw capital from your company tax free are significantly enhanced.


  • If you decide to live in Portugal you may be able to take dividends out of your company without paying income tax in either Portugal or he UK for up to 10 years.


It would be remiss of us to point out that incorporation is not a ‘one-size-fits-all’ strategy. In fact, the Property118 Tax team only recommend incorporation to around 1 in 10 landlords who book landlord tax planning consultations with them. There are several alternatives, especially if you have relatives who are not higher rate tax payers and you are considering business continuity and legacy planning as well as your income tax position. The key point is that you should seek specialist guidance from a Property118 tax planning consultant, who will prepare a bespoke report and recommendations for you before referring you to a Barrister-At-Law to adopt those recommendations as his own professional advice, for which he carry’s professional indemnity insurance of £2,500,000.

What on earth are you waiting for?


Charles Darwin once said; “it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”


When the former Chancellor of The Exchequer George Osborne announced in the Summer Budget 2015 that the basis of taxation for individual landlords was to change, those who had bothered to listen were in disbelief and the rest were oblivious.


I liken this to a madman announcing that volcano is soon to erupt.


Nevertheless, some landlords adapted.


After some time, clause 24 of the second Finance Bill of 2015 finally passed through Parliament, the House of Lords and received Royal Assent to become  FA2015(part 2)/Section24.


This was the equivalent of all scientists confirming the date and time the volcano would erupt. Those who had become aware were still in shock and disbelief, but a few more adapted.


We are now into the third year after the eruption. At the time of writing this article (November 2019) the lava has past three quarters of the way down the mountain.


By January 2019 some landlords began to feel the effects and yet some landlords are still either oblivious or looking up at the lava flowing towards them, frozen in either disbelief or fear. Nevertheless, most remain oblivious to the risks to their business and only a fraction of those facing being burned to a crisp have even investigated their options, let alone adapted.


This is landlord apathy at it worst.


When will they move?


For the sake of £400 we can complete a full Fact Find and analysis of your position and then prepare a bespoke report and recommendations outlining the optimal adaptation plan for you. This can then be checked by your existing professional advisers and we will even obtain Counsel’s opinion of our recommendations for you at no extra charge. Even after all of that, if you’re anything less than 100% satisfied you can claim a full refund under our GUARANTEE of total satisfaction.


So what are you waiting for?