QUESTION: My sister and I have built up a portfolio of buy-to-let properties in Belfast. The buy-to-let mortgages are almost repaid and we are considering the idea of putting these properties into a limited company owned equally by us. Can you explain the tax implications of doing this and the impact going forward?
ANSWER: Over the last number of years there have been a number of adverse tax changes impacting individual buy-to-let investors; restricting loan interest relief, wear and tear allowance and stamp duty.
A company is increasingly becoming a much more attractive place to hold property given that companies pay tax at a maximum rate 25% (or 19% in some circumstances where profits are less than £50,000). This contrasts against a possible 45% on income from personally owned property.
The difficulty however is getting your properties into the company as this normally triggers capital gains tax (CGT) and stamp duty land tax (SDLT) on the change of ownership of the properties.
A key factor in attracting both the CGT and SDLT reliefs is being able to confirm that a “business” exists; HMRC will challenge any claim for such reliefs where it can be viewed that the rental partnership is “passive” in nature. Confirming a business exists is based on several tests which are applied by HMRC.
From a CGT perspective you and your sister are connected with the new company acquiring your properties, the properties are deemed to transfer at market value even if no consideration passes from the company to you. There is the opportunity to claim a CGT deferral relief on the incorporation of property businesses provided three conditions are satisfied, namely:
:: All of the assets of the business are transferred to the company;
:: The business is transferred as a going concern; and
:: The consideration for the transfer of the assets/business is satisfied by the issue of shares to the vendor.
Provided the above conditions are complied with then any gain that would arise on the disposal of the properties at market value to the company is deferred by being ‘rolled over’ into the base cost of the new shares.
Another important benefit of this is that the properties are rebased to market value when they transfer into the new company therefore reducing the tax cost of future disposal for the company.
SDLT is charged on the actual consideration paid by seller but when property is transferred to a connected company, actual consideration is replaced by market value. There is an exemption to this rule for property incorporated from a partnership business.
However, the SDLT relief does not apply to property co-ownership. A partnership would typically be evidenced by a set of annual partnership accounts, annual partnership tax return, its own bank accounts/borrowings, and a partnership agreement.
If a partnership business does not exist and you try to create the appearance of one prior to incorporation, HMRC will seek to deny the valuable CGT and stamp duty reliefs with serious adverse tax implications. You should consult with your tax advisor to make sure you execute the incorporation and claim any reliefs correctly.
:: Feargal McCormack (email@example.com) is partner at FPM Accountants Limited (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies