Property Business – new tax regime

Property Investment Companies

There are a number of factors to consider when deciding whether to carry on your property business through a Limited Company or to transfer your business to a Limited Company, rather than as an individual through self-employment or a partnership.

Summary of tax payable

The table below provides a comparison between the taxes paid by each entity:

property investment companies chart

*based on the individual being a higher rate taxpayer, will be at marginal rates if basic rate or additional taxpayer.

**these rates assume that the individuals involved already own their own home. Therefore the investment properties will be additional properties.

Other matters to consider

Interest relief – Companies continue to receive a full tax deduction for interest paid on any financial loans. Individuals will have their interest relief restricted from April 2017 and will only receive basic rate tax relief from April 2020. This will not apply to individuals who own furnished holiday lettings.

Future developments – From April 2018 property businesses with income of more than £10,000 will need to make quarterly returns to HMRC under new proposals for Making Tax Digital. We are still awaiting final details of how this will work on a practical basis. This will be introduced for all businesses from April 2020.

Cost – A Limited company will need to file formal accounts to Companies House each year as well as a corporation tax return to HMRC which is more costly.

Annual tax on Enveloped Dwellings – This is an annual tax

 

Incorporating a property business

There are two ways to incorporate a business. You can either sell the properties to the company or exchange the property business for shares in the company.

In both scenario’s the main taxes which need to be considered when incorporating a property business are Capital Gain Tax and Stamp Duty Land Tax. These can be different depending on the current business structure.

A summary of the implications are:

property investment companies chart

Incoporation relief

The relief allows you to incorporate a business with no capital gain tax payable, providing the shareholders are the same as previous owners, as the gains are rolled over into the value of the shares you receive in exchange for the business. It should be noted that the gains may arise if the shares are sold or gifted in the future.

There are specific criteria that need to be meet and this can be difficult for some property business as one needs to be able to clearly demonstrate that they are running a property business and not just holding the properties as passive investments. The indicators which HMRC will consider when determining if the relief is available are:

  • number of properties
  • managmenet of properties (use of agents etc.)
  • time spent running the business
  • maximising rental returns

Failure to meet the required criteria will result in the relief being denied and tax relief payable.

Stamp Duty Land Tax

There is an exemption in the legislation which allows for a partnership business to incorporate where the partners are mirrored as the shareholders in the company. Again it does require a property business to be in operation, and joint ownership will not be sufficient.

Need our help?

Our tax team can guide you through this new tax regime, contact either Linda Warner or Justin Bond on 01483 416232.

Post by Justin Bond