On 1 April the Stamp Duty Land Tax (SDLT) zero rate band for residential property, currently £500,000, reverts to £125,000 (unless Mr Sunak has second thoughts). Rumours also abound of future increases in Capital Gains Tax (CGT) rates. And the restriction to basic rate for income tax relief on interest on loans to acquire residential investment property has been fully effective since April 2020.
These factors may lead some residential property investors to be considering transferring their portfolio to a company, with a view to
- crystallising a gain at current rates
- taking advantage of a window of reduced SDLT (albeit that the company will remain liable to pay the normal 3% SDLT ‘surcharge’)
- maximising deductions
- capturing future income at corporate rates.
For some investors, this may be the right thing to do and this may be the right time to do it. But there may be downsides:
- If you need access to your rental profits and would need to draw them from the company rather than accumulate them or use them to repay capital, incorporation may increase rather than diminish your annual tax bill.
- If there is an expectation that the company may sell a property at a significant capital gain (compared to today’s value) in the medium term and you will want access to the proceeds, the taxes payable on the gain and the distribution of the proceeds are likely to be higher than if you retain ownership personally. This may be particularly relevant if future gains are likely to be greater than current ones.
- And, of course, the additional time and costs (in administration, accounting and compliance) of running a company need to be taken into account, especially in the context of a relatively small portfolio where tax savings may be modest. These compliance obligations may include the need to file returns under the ATED regime (even if no tax is actually payable).
On the other hand, a highly-geared portfolio where all or most of the rental profit is going to be used over the medium term in repaying interest and capital on loans may well benefit from incorporation: and there may not be a better time to do it than now.
As always, careful examination of the numbers is likely to be crucial.
Of course, where partnerships or LLPs are involved, appropriate structuring may in some circumstances result in the transfer of a property portfolio (whether residential or commercial) to a company escaping CGT, SDLT or even both. Where that is so, any imminent or apprehended increases to either tax may be of less concern.
But in either case, for more information, please get in touch with your usual BKL contact or use our enquiry form.
