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BUSINESS IN FOCUS


RENTAl BUSINESSES - whAT ARE ThE OPTIONS?


INDIVIDUAlS ThAT RECEIVE RENTAl INCOmE ON RESIDENTIAl PROPERTy IN ThE Uk OR ElSEwhERE AND INCUR fINANCE COSTS SUCh AS mORTgAgE INTEREST wIll NO lONgER BE ABlE TO DEDUCT All Of ThEIR fINANCE COSTS fROm ThEIR PROPERTy INCOmE TO ARRIVE AT ThEIR PROPERTy PROfITS. ThEy wIll INSTEAD RECEIVE A 20 PER CENT REDUCTION fROm ThEIR INCOmE TAX lIABIlITy fOR ThEIR fINANCE COSTS. fURNIShED hOlIDAy lETTINgS AND COmPANIES wITh PROPERTy INCOmE ARE EXClUDED fROm ThESE RESTRICTIONS.


T


his finance cost restriction commenced on 6 April 2017 and is being phased in with the


full impact commencing from 6 April 2020 onwards.


The following are some tax planning opportunities to help mitigate the impact of the finance cost restrictions mentioned above.


OPTION 1: INCORPORATION


1. Capital Gains Tax for the transfer of rental properties to a connected company, CgT legislation deems the transfer to be at market value irrespective of the actual prices that may be involved in the incorporation. This may result in a gain subject to CgT.


Incorporation relief can defer this gain resulting in no CgT payable now. Incorporation relief can be availed off when a business and its assets are transferred to a company in exchange wholly or partly for shares.


The deferred gain is rolled over and set against the base cost of the individual’s shares in the company. The gain on incorporation will effectively be charged if the individual sells the shares in the future.


It should be noted that property businesses are not guaranteed to qualify for incorporation relief. however, the ruling in Ramsay v hmRC provides robust authority for treating substantive property letting activities as a business for the purposes of incorporation relief.


The tribunal ruled that activities ordinarily associated with the management of an investment property could be regarded as a business.


46 - PhARmACy IN fOCUS


however, there are provisions that allow partners in a partnership to transfer property to a connected company without an SDlT charge. while a partnership might at first seem to offer a relatively simple route to reducing any SDlT charge on incorporation, a jointly-owned property investment business does not, in itself, mean there is a partnership. Even so, it may be possible for jointly owned rental businesses to demonstrate the degree of commercial organisation required in order to ‘qualify’ as a partnership.


If the SDlT partnership legislation can’t be availed off some alternatives to reducing SDlT include: 1) claiming for ‘multiple dwellings relief’, to derive an SDlT charge based on the average market value; and 2) when transferring six or more properties, it may be advantageous to apply the ‘non-residential use’ SDlT rates, which are capped at four per cent, rather than the maximum twelve per cent for residential properties in a lettings business.


OPTION 2: SPREAD ThE OwNERShIP If the owner of the property business is an individual who is a higher rate taxpayer, the option of spreading the ownership of the property with other family members could be considered.


OPTION 3: SET UP A PROPERTy mANAgEmENT COmPANy Setting up a company to manage the property business and charging the property owner for the provision of these services will move profits into the company and be subject to the lower corporation tax rate.


The amount the company can charge would be limited to a justifiable commercial rate. An excessive payment to a connected company may be disallowed in the event of an hmRC enquiry.


There is also the issue of what to do with the money once it is in the company. Extracting monies via a dividend may result in an income tax cost at the dividend rates of 7.5 per cent/32.5 per cent/38.1 per cent.


Another consideration is that the company will need to receive cash payment from the individual for the services it provides, otherwise a form of corporation tax chargeable at of 32.5 per cent would arise.


2. Stamp Duty Land Tax The next consideration is generally SDlT. It does not matter how the transfer of property to the company is structured, eg, gifted for no consideration, transferred along with the business in exchange for shares, sold at undervalue for cash and so on, the company’s SDlT charge will always be calculated by reference to the market value of the property.


The simplest example would be transferring solely owned property into the name of the individual and his or her spouse if they are a basic rate tax payer.


Transfers to a spouse don’t normally give rise to a CgT charge. SDlT can arise if the transferee is treated as effectively taking over a proportion of the mortgage.


fINAl NOTE The decision of what to do with your property rental business is not one to be taken lightly, with legal, commercial, taxation, administrative and refinancing issues all needing careful consideration before your decision is implemented.


If there is anything in this article that affects you or somebody you know please speak to Steven McVitty for independent professional advice.


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