Incorporation

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    Incorporation

    Some tax advisor have suggested incorporation as a way to mitigate new higher taxes. My concern is that this tax advice, will earn great money for the advisor, but it could expose me to CGT if things go wrong.

    #2
    If you already own properties, the complex bit is moving them into the limited company without paying tax.

    The suggestion seems to be to create an "active partnership" where the partners own the properties and the admin and management are sufficient to allow incorporation without paying the cgt that would otherwise be due on the transaction.

    That seems remarkably tricky to me - most landlord's investments don't require anywhere near the amount of work per week to meet the required threshold, and I have, having discussed this with my accountant, decided that this isn't something I would contemplate, personally.

    If this is what your advisors are proposing, it would be interesting to see if they have a) been successful in such an attempt, b) been successful in opposing a challenge from HMRC or (I guess) c) managed to get their advice covered by their professional indemnity insurance if they turn out to be wrong.

    There are a lot of footballers finding out that tax advice isn't always right and that HMRC have a long time to act retrospecively.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      The adviser seemed to suggest 5 properties as a minimum. Although nothing is written in concrete.

      "most landlord's investments don't require anywhere near the amount of work per week to meet the required threshold"

      A farm grower will be more busy during certain times of the year and less busy during others. It is the same with landlords.

      The authorities have also introduced a lot of new regulations over the years e.g. EPC, deposit protection, gas safety check, smoke alarm checks, licensing, Right to Rent (immigration checks), giving out the How to Rent Guide, Article 4, Licensing schemes.... The tax rules have not kept up to date with the changing landscape.

      A very serious breach of housing act 2004, could mean a landlord going to jail. Hardly a passive investment such as holding stocks and shares.

      The HRMC had an interesting consultation, where those landlord in areas of Licensing could have their tax status checked, as part of condition of being issued a license.

      In the consultation HMRC they say "
      These have been selected because existing licence conditions align reasonably well with tax-compliance measures; they apply to sectors vulnerable to hidden economy activity; and there are broader potential benefits to be realised in driving up wider regulatory standards."

      "The hidden economy also distorts fair competition and is linked to wider rule breaking and criminality, including money laundering, health and safety violations, failure to comply with employment rights and immigration offences"

      "55. The government values the private rented sector and wants to see a strong, healthy and vibrant market, which meets housing needs in a professional way."

      Even in areas of no Licensing, landlord have to comply with the same sort of regulations.

      HMRC has not been challenged on this. Tackling the hidden economy: public sector licensing
      https://www.gov.uk/government/consultations/tackling-the-hidden-economy-public-sector-licensing




      Comment


        #4
        Yep.

        Some of those are great arguments for running a letting business as a limited company.
        None of them are good arguments from migrating from running a letting business as a private individual to running one as a limited company.

        And the amount of work argument is a chocolate teapot.
        All of those new requirements apart from licensing apply to a new tenancy (average tenancy length is 18 months) and licensing isn't an issue for 95% of landlords.
        Several hours a week for two of you?....

        Don't let me put you off, I'm risk averse and there are a number of people going this route.
        But I'm not (and I have enough properties to qualify and do quite a lot of "work" per week)
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Bottom line is I cannot see that you can (legitimately) avoid an instant massive CGT bill if you transfer a whole bunch of existing properties. If you are persuaded, I would insist to the advisor that you pass the plan in advance by HMRC and will proceed if they accept that CGT will not be payable. I suspect they will try to persuade you not to do this.... which will tell you everything you need to know.

          Comment


            #6
            Flashback1966,

            The CGT is 18% or 28% rate on your capital gain. If you transferred say 6 properties in same year , you may have a capital gain of say £120K and have to pay £30K in tax. But if you make one transfer each year, you can claim £11.5 K free allowance for cgt.

            So you have to calculate what your capital gains tax bill to transfer may be and how much annual income tax is saved.
            .
            The upper income limit for 20% tax payers is around £43.5 K . Above this income limit , your excess income ( rental profit ) is charged the higher tax rate at 40%.

            Are you already paying 40% tax rate now on your rental profit ? How much annual loan interest are you paying ?

            Comment

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