Incorporating your property business
On the back of the government’s focus on diverting private investment away from the buy to let market and into areas more likely to stimulate economic growth, the 2015 budget revealed some key tax changes for property businesses. These changes have led a significant number of property investors to consider whether it could be potentially beneficial to incorporate their business for the purpose of taxation.
Perhaps the most significant announcement in the budget was that tax relief for mortgage interest and other finance costs is to be progressively disallowed for the 2017/18 tax year onwards in rental income and expenditure accounts. Whilst there is a corresponding tax credit against the individual’s income tax bill, this is only at 20%, resulting in those paying tax at 40% or more being significantly worse off. However, this restriction applies to unincorporated residential property businesses only.
Further, higher rates of Stamp Duty Land Tax (SDLT) in the form of a 3% surcharge will be charged on buy to let properties and second homes costing over £40,000 with effect of 1 April 2016. George Osborne said ‘’This extra stamp duty raises almost a billion pounds by 2021 and we’ll reinvest some of that money in local communities in London and places like Cornwall which are being priced out of home ownership.” Again, this extra tax will not be payable by corporate property owners.
The restriction on mortgage interest relief and the SDLT surcharge has generated a significant interest in the potential benefits of incorporating a property rental business into a limited company. However, there is far more to consider when deciding whether to incorporate a business than trying to avoid tax, and whilst incorporation may be a tempting and worthwhile step it is not a decision which should be taken lightly. Furthermore, bear in mind that reversing an incorporation is likely to be a messy affair.
There are also numerous other tax aspects to incorporating a business including capital gains tax, capital allowances, inheritance tax and VAT, and tailored, competent tax planning advice is essential before such a transaction is entered into. The new rules on taxation of dividends effective from 6 April 2016 also need to be reviewed.
A further consideration is the impact on existing and future funding arrangements, as incorporation will invariably go hand in hand with a re-negotiation or refinancing of any borrowing arrangements. Historic rates and lending terms in a changed marketplace may no longer apply with funders also focusing on the competency of the tax advice which sits behind any restructuring.
To discuss the implications of incorporating your property business and the issues involved please contact James Greenhalgh, Tax Director at Cowgill Holloway, Chartered Accountants and Business Advisors.
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