Recent activity in the property market shows a significant swing towards the acquisition of rental properties by corporate investors, something that was predicted following the apparent focus of the new legislation upon buy-to-lets in private hands. The fact that the Government is also consulting on SDLT exemption for companies holding more than 15 properties has led commentators to believe that the trend towards incorporation will continue to increase beyond the uplift in SDLT rates on 1 April.
Apart from the possibility of a more benign SDLT regime there are other fiscal advantages to the holding of rental properties in a corporate structure:
- The restriction to the interest relief on borrowings to acquire rental properties does not apply to companies;
- Corporation tax (CT) rates applying to rental profits accruing to a company are significantly lower than the income tax rates applicable to an individual landlord. The single CT rate currently stands at 20% while income tax rates can be as high at 45%;
- On the disposal of an investment property in a company a CT rate of 20% applies to the gain and companies are still able to claim indexation relief, a deduction that removes the impact of inflation from the gain calculation. For individuals, capital gains are taxed at rates up to 28% and there is no indexation allowance.
Given the apparent tax advantages enjoyed by property letting companies are we likely to see a swathe of private landlords opting to incorporate their businesses? Maybe not. Apart from increased compliance costs and the disadvantage of the ‘double charge to tax’ (profits and gains are first taxable within the company and then on the landlord when funds are extracted), incorporation involves the disposal of the chargeable assets by the individual landlord or landlords to a company, which has separate and distinct legal personality. This means that a capital gains tax (CGT) charge on the individual landlord is a distinct possibility.
In some circumstances CGT incorporation relief may be available but as with all material transactions, the watchword must be to obtain advice. The current landscape concerning the property rental sector is however far from static and there is always the risk that today’s advice could soon be overtaken should the Government’s next target be property investment companies and not just individual landlords.
Mike Chapman, Senior Manager, Corporate Tax, Knill James Chartered Accountants, UK200Group Members.