How To Lower taxation cost on profits retained in a limited company

  • Tuesday, 15 December 2015
  • 487884 times
How to Lower taxation cost on profits retained in a limited company Prior to now, when asked by clients whether buy to let properties should be bought in their own names or whether they should use a limited company we have always said “it all depends”. Well the Summer Budget 2015 has altered everything and whilst the answer is still “it all depends”, the balance has shifted markedly in favour of limited companies. When considering the purchase of an additional buy to let property the key factors to address are: The proposed restriction on the tax deductibility of finance costs for individuals (but not for limited companies) Higher BTL mortgage product interest rate costs if borrowing in a limited company Higher administrative costs if buying in a limited company Lower taxation cost on profits retained in a limited company Tax cost of extracting profits from a limited company We have always advised clients to take professional tax advice covering their own circumstances and this is all the more important now with the proposed changes. Transferring existing rental property owned personally into a limited company So, if a client determines that it makes sense to buy properties in future through a limited company, then does it also make sense for them to shift existing properties owned personally into a limited company? There is no simple answer to this and there may be a different answer to that applicable to a purchase of an additional property. In order to transfer the properties into a limited company, the properties must be legally sold – and this gives rise to three potential, additional costs: Stamp Duty Land Tax on the sale to the limited company Capital Gains Tax Early Redemption Charges on existing mortgages and re-mortgage costs Stamp Duty Land Tax Legislation requires that for stamp duty purposes, the sale of a property to a company owned by the vendor is deemed to take place at open market value and tax is levied at the following rates: Property or lease premium or transfer value SDLT rate Up to £125,000 Zero The next £125,000 (the portion from £125,001 to £250,000) 2% The next £675,000 (the portion from £250,001 to £925,000) 5% The next £575,000 (the portion from £925,001 to £1.5 million) 10% The remaining amount (the portion above £1.5 million) 12% This applies regardless of the type or amount of consideration given by the “acquiring” company (e.g. gift, sale at undervalue or full market value, or a transfer in consideration for the issue of new shares by the company). Capital Gains Tax The Capital Gains Tax position is rather more complex. Prior to last year the situation was that any such sale would leave the vendor liable to pay Capital Gains Tax in accordance with the normal rules. However in a landmark ruling last year by the Upper Tier Tax Tribunal (Elizabeth Moyne Ramsey v HMRC [2013] UKUT 266 TC), it was determined that in certain circumstances the landlord could claim incorporation relief under s162 Taxation and Chargeable Gains Act 1992 thereby deferring any tax until such time as the property is sold by the acquiring company. The key factor here was that the taxpayer devoted 20 hours a week to various activities of collecting rents, and property and garden maintenance. As a consequence the property (a house split into 10 flats) was determined to be a business (eligible for incorporation relief) rather than an investment (ineligible for relief). Given the potential incentive for landlords to incorporate now, it is possible that HMRC will appeal the Ramsey decision – but for now this is the law! So what factors would HMRC and the Tax Tribunals consider in determining whether the property is a business or an investment? There is no definitive guidance available so the following are just my thoughts on some factors that might sway any decision: Investment Owner has full time paid employment not associated with the property Owner uses an agent to collect rents and manage the property Business Owner selects tenants himself Owner collects rents himself Owner undertakes minor maintenance work himself Owner can demonstrate that most of his income comes from the property/properties These are only a few ideas and clearly if the owner had, say 100 properties, it would not be reasonable to expect him to be doing minor maintenance himself in order to prove that he was running a business. It would all depend on individual circumstances! Early Redemption Charges The sale to the limited company will automatically involve redeeming any existing mortgages as well as arranging a new mortgage. If the existing mortgage is still within its ERC term then ERCs will be payable – it may make sense to defer any incorporation until after expiry of the ERCs even if this means that the landlord suffers some additional tax as the new proposals start to be phased in in 2017/18. As ever, individual circumstances will determine this. Finally, I am sure that clients letting furnished properties will have also read of the withdrawal of the 10% “Wear and Tear” allowance against tax – and the substitution of actual costs with effect from April 2016. There is an obvious opportunity here to save some tax by deferring expenditure that might otherwise have been incurred this year – and thus ensuring that full allowance for this received in 2016/17. Important: Please note that none of this is intended as tax advice – clients must take their own advice from a qualified taxation advisor. Of course, we can help with enquiries regarding buy to let mortgages for limited companies. Our expert brokers will be happy to help and can be contacted on 01628 623600
Last modified on Friday, 19 February 2016 13:01

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