Incorporation is not the Holy Grail
By Tony Gimple
Landlords are worried about tax.
And they’ve got every reason to be. Simple Landlords Insurance’s stats show that Stamp Duty, Capital Gains Tax, and the infamous Section 24 all hit the top of the list of landlord concerns.
So, landlords are looking for solutions. And they’re being sold incorporation as the quick fix for all their woes and troubles.
Incorporation is not the Holy Grail. In fact, I’d go so far as to say it’s a Very Naughty Boy. (Or at least a Very Bad Idea).
Look, on the surface, incorporation seems shiny. Limited companies can deduct 100% of their financial costs from their tax, for instance.
But shiny is for magpies – and if you’re dazzled by it you really could end up coming a cropper.
The transactional costs
First of all, you've got transactional costs like professional fees and re-mortgaging (and it's quite a lot harder avoid a remortgage if you incorporate than you might think). Then you have to qualify for something called S162 Corporation Relief – the means by which you can switch ownership of your portfolio from your name to your new limited company name without the Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT).
But HMRC no longer pre-approve S162 applications, so you wont know whether you'll have a tax bill for CGT or SDLT for maybe two years i.e. until it’s too late.
What’s more, you’ll have early redemption charges, brokers fees, lenders fees and legal fees – and you won’t be able to carry your losses forward.
One big thing to remember, when it comes to your mortgages, you'll suddenly find that all that fluffy consumer-protection legislation you had as an individual borrower simply doesn’t apply to you now you’re a big bad commercial company.
The cost of being a commercial
It turns out going commercial can get expensive.
Not only is your choice of lenders reduced, but the interest rates are higher, and they'll require a personal guarantee from the shareholders and directors. You’ll also find yourself tied to the first lender you choose and their appetite to lend to you again, because switching will be complex and expensive.
If property prices fall and increase the loan to value point your lender agreed, you'll have to find the cash difference yourself. Oh, and they’ll restrict what you can borrow to fund your everyday life.
The tax position
Limited companies and the individuals within them are taxed in 7 different ways. Read them and weep.
1. Corporation Tax
(19% falling to 17%, but could be uplifted for investment companies)
2. Capital Gains Tax
(On personal withdrawals of capital from sold assets – 10%, 18%, 28%)
3. Income Tax
(20%, 40%, 45% and 60% for incomes between £100,000 and £123,000
4. Directors Loan Account Tax
5. Dividend Tax
(7.5%, 32.5% and 38.1%)
6. Employees and employers National Insurance
(12% and 13.8%)
7. Inheritance Tax
(40% for investment companies that hold residential properties for over a year for the sole purpose of collecting rent).
If any of this is news to you, you need to step away from the cup and think again.
Or lose big.
Concern yourself not with taxes, but whether or not you are running a professional property business.
Running (or aspiring to run) a professional property business gives you more options, and looked after properly, will last beyond the grave - especially if you’re in a position to drink from the Hybrid Grail…
The Hybrid Grail
The point is that successful, growing and emerging landlords are clearly adapting to their surroundings and changing their investment strategies and business models accordingly
That means thinking carefully about tax and getting the right advice. Here at Less Tax for Landlords that's our job. And for most of the landlords we meet it's a hybrid business model that seems to come out as the most efficient way to maximise the commercial benefits of building, growing and running a professional property business (and yes that includes minimising your tax bill!)
There's no need to remortgage, no CGT, no stamp duty, basic rate tax on your property income, Inheritance Tax is typically mitigated within 2 years, you get freedom of choice in finance and commercial flexibility, and it's within both the letter and the spirit of the law.
Chances are that if you're a landlord with a reasonable portfolio and you're currently paying more than basic-rate tax on your property income, then The Hybrid Grail could work magic for your property business too.
For more information please visit lesstaxforlandlords.co.uk and take our free business property assessment for an indication on whether a portfolio restructure would work for you.