Those familiar with the property sector should now be aware of the changes that take effect from 6 April 2017 which restrict tax relief for the finance costs incurred by individuals in respect of residential investment properties.
After these changes were announced in 2016 there has been much discussion as to whether residential properties are better held in a corporate entity. There is also the question of how new acquisitions should be structured, i.e. should these be in a corporate vehicle from the outset?
The answer? Individual circumstances will determine the options available and best way forward. There is no one size fits all answer.
Help in reaching the decision – what to consider?
This article does not restate the arguments for and against using a corporate structure but seeks to highlight the key questions that should be considered.
Incorporation of existing portfolios
Q. Why are you considering incorporation?
Is this just due to the changes to tax relief for finance costs or perhaps for other wider reasons, such as inheritance tax planning? On the basis that it is driven just by the changes to tax relief for finance costs:
Q. What is the tax cost of the new rules?
Don’t assume that the new rules will result in a huge increase in tax payable, they might, but equally they might not. Calculate the predicted tax increase based on current properties and your future intentions. Understand what the actual cost is before making any decisions.
Q. What is the tax cost of incorporating?
Unless tax reliefs are available capital gains and stamp duty land tax charges are likely to arise on incorporation. If no tax relief is available what are these costs likely to be? The tax cost of incorporating may make it unfeasible or it may be an upfront cost that you are prepared to incur for the benefit of longer term tax savings.
Will any reliefs be available to defer the capital gains or remove the stamp duty land tax charge? If not, why not, can anything be done to improve the position?
Acquisition of new properties
When acquiring new residential investment properties there is no question of tax on incorporation. The question instead is what are the benefits and drawbacks from acquiring the properties in a company.
Don’t forget the commercial aspect!
For existing and new properties be aware that, as well as the tax issues, it may not be as easy to obtain financing via a corporate or the rate of interest charged may be greater. Speak to your current and alternative lenders so that this can be taken into account in your considerations.