Recent changes in government policy have had a significant impact on individual’s owning property. Changes restricting the deduction of finance costs to a basic rate of tax and the introduction of the 3% SDLT surcharge have led many of our clients to consider whether a corporate structure is a more effective way to own a property portfolio.
Interest chargeable on property financing costs are restricted for individuals from 6 April 2017. By 6 April 2020 individuals will only be able to claim a deduction for these costs up to the basic rate of income tax at 20%.
Individuals who acquire a second property will pay an additional 3% SDLT ‘surcharge’. This charge is not relevant for corporate entities acquiring property.
Individuals who hold property personally for a rental property business will be subject to income tax on the taxable profits realised from these investments. This can be at the higher rate of 45%. Capital gains tax is due at 28% on the taxable profits from any sale of residential property however, property that is sold within a property trading business will be taxable as income if this is an individual’s trade.
If a company is used to hold a rental property business it will pay corporate tax on any rental profits and chargeable capital gains at the rate of 19% (falling to 17% in 2020). The individuals behind the business can extract funds from the company by way of salary, benefits in kind, and dividends. The original value of an individual’s investment in the company can be withdrawn free of tax consequence from the company.
Incorporation of an existing business
Individuals who hold property personally can transfer the rental property business to a company in exchange for shares. Disposal of a property gives rise to a chargeable capital gain however transactions in these circumstances will not give rise to a chargeable gain if incorporation relief is available. This relief will be available if the rental business is transferred as a going concern.
Stamp duty land tax is a consideration however there are planning opportunities that exist in this area to greatly reduce the amount of tax payable or exempt a charge in this area altogether, dependant on the circumstances of the rental business and relevant individuals.
The benefit of using a corporate structure is that excess profits that are intended to be reinvested in the business and are not required by the individuals behind the business are only taxable at a corporate level if these are not withdrawn from the company.
Longer term planning to maximise capital gains tax relief is also a key consideration. Allowing the profit to accumulate in a company structure, being taxable at lower corporate rates, provides individuals with the opportunity to consider future liquidation of the company in order to extract these funds under a more favourable capital tax rate of 20% (this rate can be reduced to 10% if Entrepreneur’s Relief is available).
Property held as an investment by an individual will not qualify for any Inheritance Tax relief and the value of the property can attract an Inheritance Tax charge of up to 40% on the death of the individual.
Inheritance Tax planning can be more effective if property is held within a company structure.
Inheritance tax would be due on the value of the shares in the company and the possibility of gifting shares to different family members and trusts on a gradual basis can reduce the value of an individual’s estate for inheritance tax purposes. In addition, succession planning using second generation members of the family who can hold different classes of shares is also a valid opportunity.
Would you like help and advice on this or any other tax issue?
Please contact our office for more advice on these changes and how they may impact you. To make an appointment to speak with one of our specialists please telephone 01932 564098 or email us using our ‘Contact Us’ page.
This article was published in June 2018 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.