Is Leasing your Property Portfolio to a Company a New Tax Loophole
It’s currently the hottest topic amongst landlords, how to legally re-structure the way your property portfolio is managed before the governments new tax changes for landlords come into effect. The ability for landlords to be able to deduct the cost of their mortgage from their income is coming to an end and many landlords are now facing higher tax bills and even worse some will be forced into a higher tax bracket. With the prospect of having to give 40% of their rental profit to the taxman 1000’s of landlords have started to sell their property portfolio to their own limited company which comes with many complications and costs, such as the new 3% higher rate of Stamp Duty for second home owners. But is there a easier way of re-arranging things? Rather than selling your own property portfolio to a company some landlords have simply leased their portfolio to a limited company, avoiding a lot of headache and costs.
Firstly lets discuss the normal method of selling your property to a company and then we will take a look at the loophole of leasing your property to a company:
Common Method – Sell Your Property to Your Company
Set up a company so that you only pay Corporation Tax at a rate of 20%. This means that rental profits are taxed at 20% and when you sell a property the Capital Gain is also charged at the Corporation Tax rate of 20%. This will be reduced even further to 18% by 2020.
In addition, different to the status of being a individual a company can view mortgage interest as an expense and therefore it can still be offset.
(1) You Will Have to Pay Stamp Duty
This is a big stumbling block. From April under the new rules there is a further 3% Stamp Duty to paid on top of the normal rate of Stamp Duty, for anyone who owns a second home and more.
This means that landlords with a property worth between £250,000 – £925,000 they will be paying 8% in Stamp Duty. For properties worth £1.5m the Stamp Duty payable is 15% in real cash terms that’s £225,000.
(2) A Company BTL Mortgage Requires a Higher Loan to Value
Often these mortgages cost more and require a Higher Loan to Value so you may only be able to transfer from an individual mortgage status to a company mortgage if you have enough equity available.
(3) Re-Buying your Property’s will Incur Mortgage Fees and Costs
BTL mortgage products that are designed for companies usually have higher fees and rates than individual status mortgages and these will have to be paid when transferring mortgage products. Other costs such as legal fees, accountant fees etc. will add up
Our Recommendation – It’s trickier to get a BTL mortgage for a company rather than an individuals status, however due to the recent demand there are a lot more BTL company mortgage products coming onto the market which the government are trying to quash. To give your company a better chance of obtaining this type of mortgage you will need to set your company up as a Special Purpose Vehicle, meaning that it’s only purpose is to hold property and doesn’t carry out other business activities.
(4) You May Have to Pay Capital Gains Tax
You will have to sell your property to your company at it’s current market value which will be established by the opinion of a RIC’s Surveyor. Any profits made since you originally bought the property MAY be subject to Capital gains Tax.
Our Recommendation – Since 2013 You only have to pay CGT if your activities are viewed as a “Investment” But Not a “Business”:
To Be Viewed as a “Business” i.e. Don’t have to Pay CGT
- You Directly Manage the Tenants
- If you carry out Maintenance yourself
- If Managing your Portfolio is Your only Job
To Be Viewed as a “Investment” i.e. You Do have to Pay CGT
- You Employ a Agent To Manage your Tenants
- You Employ someone to carry out Maintenance
- You Have another Job
Loophole – Lease Your Portfolio to Your Company
There are clearly many benefits to moving your portfolio under the umbrella of a company but the costs of selling your portfolio to your company are making this a very tough route to orchestrate. Within landlord Forums it appears some have found a way of receiving the benefits of operating under a company status without the costs of Stamp Duty or re-mortgaging.
- Set up a Company and Lease your properties to your new company for a lease amount that is very similar to the cost of the mortgages.
- The Limited company then manages the portfolio and lets to the tenants.
- The Cost of Leasing Can be offset by the Company.
- Rent will be taxed at 20% Corporation tax. Not the 40% an individual must pay.
This Type of Commercial Arrangement Commonly Exists
This could be viewed as being similar to a “rent to rent” management scheme whereby a limited company takes on the responsibility of managing a property and makes the difference between what they pay for the arrangement and the amount they rent the property for. Even Councils and Housing Associations operate via this method known as “Private Sector Leasing Schemes”.
You off course still need to pay tax on any income derived from the company and dividends. At the same time your limited company will be able to off-set expenses such as the cost of the office, bills, insurance etc.
If you do wish to put your tax affairs in order in a way that reduces your tax bill then under English law this is something that you are fully entitled to do, for example you can place income into a ISA or Pension scheme, Savings Bonds etc. all constructed to pay less tax. Before rearranging the structure of your property portfolio things can be quite complicated so we do urge you to seek advice from an experienced accountant and/or legal professional with experience of the industry.
Furthermore, none of the restructuring methods contained within this article should be deemed as advice. This article simply highlights methods that are currently being discussed amongst landlords on the industry.