The economic landscape for property investors has shifted significantly over the last five years. The introduction of higher rates of stamp duty land tax (SDLT) for additional residential property and the withdrawal of mortgage interest relief have had a noticeable impact on property investors.
With these substantial changes, a number of investors who have grown a portfolio in their own names are now looking to invest and manage the portfolio through a company. This comes with several advantages:
- Companies pay tax at 19% rather than 40% for higher rate taxpayers.
- By forming a company, you are able to control the timing and extent of your income tax liabilities on the income withdrawn. This can be particularly tax efficient.
- A company provides greater flexibility for family income planning, inheritance tax planning and succession planning.
Does incorporating create any tax issues?
Unfortunately, tax legislation does not favour buy-to-let investors. Whilst most entrepreneurs, moving from personal to corporate ownership benefit from a whole host of tax reliefs, buy-to-let investors are faced with significant tax barriers including capital gains tax and stamp duty land tax. More often than not, these charges will act as a barrier to incorporation.
What can be done to mitigate these tax issues?
Ultimately, the way to mitigate these issues is dependent on the individual’s specific circumstance and objective. However, one common strategy is to take advantage of certain reliefs which may apply to mitigate the potential capital gains tax and stamp duty land tax liability.
Where the portfolio constitutes a business (meaning you spend at least 20 hours a week managing properties yourself), incorporation relief may apply to mitigate any capital gains tax liability. When it comes to stamp duty land tax, multiple dwellings relief may help minimise the liability. At Dunkley’s we have a specialist property tax team on hand to help manage these liabilities without any immediate cashflow disadvantage and develop bespoke plans to ensure the upfront costs laid out are recovered over time.
So… Should I incorporate?
Whilst many investors will benefit from operating a company, especially where the intention is to reinvest the profits and grow the business, it may not be suitable in all circumstances.
Incorporating properties are for long-term investment and tax saving. It is most suitable for individuals who have large portfolios consisting of 3 or more properties and are looking to keep these properties for the long term. Incorporation is not beneficial for property owners who sell their company properties and take cash out as they may be faced with a double tax charge on the disposal and cash withdrawal.
As each individual case is different, it is important that informed decisions are made outlining the advantages and disadvantages of an individual’s circumstance before incorporation takes place.
How Can We Help?
At Dunkley’s, we have a specialist property tax team who are experienced in advising property investors, developers, and entrepreneurs on structuring their businesses both from a commercial and tax perspective.
They can help identify, implement, and manage the process of structuring your business so it is done in the most tax-efficient way. To find out how we can help you, call Chloe, our Tax Client Manager, on 01454 619900 or email advice@dunkleys.accountants.