Buy to let incorporation
From Shipshape March 2017 | Uploaded 10th March 2017
If you’re a residential property landlord facing the restriction of income tax relief for your finance costs, it may be worth considering the possibility of incorporation.
With the position on tax relief for interest paid by companies tax seemingly unchanged, residential property landlords who are individuals might consider incorporation. If HM Revenue & Customs accepts that your letting activity constitutes a ‘business’, which is by no means a given (your time spent on it is a key indicator), then there is no capital gains tax (CGT) to pay on exchanging your properties for shares in a new company that you own. The company is treated as acquiring the property at its market value, but your cost of the shares in the company for CGT purposes, used to work out your capital gain or loss when you sell them, is adjusted to be the same as the original cost of the property.
If the business is a partnership, and the partners’ interest in the new company is the same as in the partnership, there should be no stamp duty land tax (SDLT) payable on the transfer. However, if the transferor is a ‘solo’ landlord, SDLT would be payable on the market value of the properties transferred. One practical complication is that any mortgage on the property will need to be taken over by the company. Many lenders will either seek repayment or take the opportunity to renegotiate the terms of the loan.
Once the business is incorporated, the landlord(s) may then determine the change in the after-tax income – if the company’s profits are distributed as dividends.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.