One of those situations where the question asked appears to contain the answer:
“I need a company for my buy to let portfolio – can you help me do that?”
It’s a common question at the moment.
Why a company? The restrictions to interest relief for individuals is the main driver, especially where the change pushes a basic rate taxpayer into higher or additional rate tax. Many with high rents covered by high debt don’t appreciate the impact this will have on their tax position.
Capital gains tax problems? Where properties stand at a gain, transferring these to a company may trigger tax. Although incorporation relief is available, property rental may not qualify. A taxpayer won on this issue (see this case) but on specific facts that will not apply to many landlords. If the properties are not standing at a gain, or just a small gain, this problem goes away.
Banking? some promote the idea of a beneficial trust company, in an attempt to use a company without telling the bank (see this article) but that would be foolish. An early discussion with the bank to get them onside with holding debt in a company is essential – it increases their risk and they may say “no” or increase their charges and interest.
What about SDLT? a transfer to a company usually will trigger Stamp Duty Land Tax. There is a relief for partnerships but two problems arise: have you really got a partnership (rather than just joint ownership) and have you put a partnership in place to avoid SDLT (in which case anti-avoidance rules probably catch it)?
Future how will you extract profits? Is there a double layer of tax on sales? What future changes to tax or company law could put you in a worse position? Will buy to let companies be targeted by anti-avoidance legislation? Will collapsing (liquidating) the company if things change cause additional taxes?
Overall there is a strong hint that the Treasury and Bank of England wish to discourage smaller buy to let landlords, to protect against a property crash, so any planning may be targeted by future legislative changes.
An outline plan
- work out your tax impact of the interest relief changes;
- consider if you need to adjust your debt, even if that means selling some property;
- speak to a financial adviser on commercial property (which tends to have a better tax treatment), indirect property investment, asset diversification, ISAs and pensions (ie generally, what exposure should you have in a balanced porfolio to debt funded residential property?);
- if an adviser says that you should qualify for incorporation or SDLT reliefs, do they mean will qualify? Are they or you taking that tax risk if HMRC challenge and win? (Beware the “we have Counsel’s opinion” line – to me that indicates they see risk, not safety.);
- Don’t pretend to be more actively involved than you are in reality in order to get incorporation relief and don’t set up a partnership just to avoid SDLT;
- Consider a company for new acquisitions;
- Consider a transfer of the existing property and debt to a company, if you are satisfied that it can be done with low or no tax and the bank are happy to do so;
- Work out the costs and administration of having a company;
- Expect future attacks on buy to let property.