Incorporating a property business or buy-to-let portfolio is no small decision.
It presents both opportunities and complexities, especially in the realm of tax considerations.
In this week’s Friday Tax Tip, we aim to simplify these complexities for you.
(Read Time: Approx. 6 minutes)
Topics Discussed:
- The interplay of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) in property incorporation.
- Various tax considerations associated with Corporation Tax and the intricacies of Value Added Tax (VAT) in property businesses.
Incorporation: Property Business/Buy-to-Let
When considering the incorporation of a residential property business, several key questions arise.
For instance, how can you optimise the reliefs available during incorporation?
Which options and decisions are relevant to the creation of the business?
Furthermore, it’s crucial to understand the associated Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications.
CGT Intricacies
Transferring land and property upon incorporation inevitably triggers CGT implications.
It’s deemed to take place at market value, even between connected parties.
The rate of CGT depends on your tax band: 18% for basic rate taxpayers and 28% for those in the higher bracket.
However, it’s worth noting that reduced rates of CGT (10% and 20%) don’t apply to UK residential property disposals.
CGT is not a straightforward calculation; various elements influence the final amount.
These include the market value of each capital asset, its initial cost, any legal expenses, and the Stamp Duty Land Tax (SDLT) on the original purchase.
There’s also a glimmer of hope in the form of CGT relief, available on the incorporation of a business under s.162 TCGA 1992 Holdover (Incorporation Relief).
This is particularly helpful in holding over the gain made on disposal.
However, claiming this relief isn’t always straightforward.
It’s restricted under certain conditions, such as if any consideration is paid in cash.
Corporation Tax Changes
From April 2023, the main rate of Corporation Tax rose to 25%.
This might seem intimidating, but there are nuances. Companies with chargeable profits below £50,000 will still be taxed at 19%.
Meanwhile, those with profits between £50,000 to £250,000 will face the 25% rate but can claim marginal relief.
The Nuances of SDLT
SDLT is a significant concern when transferring properties during incorporation.
The company incurs this tax under section 53 FA 2003 if the market value surpasses the SDLT threshold for residential properties.
But these nuances are often subject to change; in Scotland and Wales, for instance, SDLT has been replaced by the Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively.
Planning Ahead – SDLT Considerations
Forward-thinking is crucial.
For instance, if you hold a property solely in your name, transferring it into joint names and subsequently into a partnership before incorporation can be a strategic move.
The “sum of the lower proportions” applies when partners, now shareholders, retain the same beneficial ownership levels in the new company as they had in the partnership property.
However, this comes with its own set of CGT implications, and also lenders will need to be informed.
It’s advisable for the partnership to be operational for at least two years before incorporation if one intends to claim SDLT relief.
The Intricacies of VAT
The world of VAT brings its own set of challenges and considerations.
Most residential property businesses aren’t VAT registered.
However, for those who are, especially under the VAT Flat Rate scheme, careful consideration is needed, particularly if the property is a buy-to-let.
There are many instances when VAT can be applied to property businesses, depending on some circumstances.
To give a few examples:
- Bed and Breakfasts: providing services such as breakfasts
- Renovations and conversions in letting properties: these can incur VAT costs for the property owners
- Maintenance costs: These can include VAT when using the services of other companies, when not included in a zero-rate scheme.
Capital Allowances
It’s essential to understand that expenses on plant and machinery for use in a dwelling don’t qualify for capital allowances as per section 35 CAA 2001.
Inheritance Tax
Incorporating Buy-to-Let (BTL) properties into a company is a notable strategy among UK landlords, primarily for Inheritance Tax (IHT) benefits. Key IHT advantages include:
- Business Property Relief (BPR): Company shares may qualify for BPR, potentially offering significant IHT relief. Eligibility is intricate and based on specific criteria.
- Share Structuring: Companies allow differentiated share allocation to family, enabling wealth transfer without relinquishing asset control.
- Gifting Shares: Rather than direct property transfer, which attracts SDLT, landlords can gift company shares over time to limit IHT.
- Loan Accounts: Using a director’s loan for property transfers can help strategically reduce IHT estate value.
- Strategic Succession Planning: Companies offer avenues for streamlined succession, potentially integrating trusts with company shares.
However, BTL incorporation has its challenges, including potential CGT, SDLT implications, and company management complexities.
Given these nuances, landlords should seek expert consultation to align strategies with their broader financial goals.
Navigating Business Liabilities
Handling debts, especially when they’re secured on a property like a mortgage, is crucial during incorporation.
Such debts cannot simply be transferred or “assigned”.
Instead, a debt may be “novated” to another party, which involves shifting the debt with the agreement of the lender.
It’s essential to understand the specifics when creating a property business in order to correctly handle debts you may have prior to this business.
Summary
Incorporating a residential property business is a meticulous process.
While this guide serves as a general roadmap, the process can be more complex and intricate, and will typically need more detailed advice depending on your personal circumstances.
Engaging with tax professionals, such as the Tax Expert, allows you to tackle the complex world of creating a property business armed with the latest knowledge and best strategies.
Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.
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Kind regards,
Ilyas Patel