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#TaxTuesday: Week 3 – The process of incorporating for tax purposes
April 18, 2017Article by Paul Avery
Welcome to another #TaxTuesday.
In this post we compare the effortless process of slotting new properties into a buy-to-let business with the fiddlier (but achievable!) one of making existing assets qualify for tax relief.
What does the incorporating process involve?
Starting a company in the UK is as easy as filling in an online form. You can set one up to hold a single property, or an ever-expanding portfolio.
Is it easy to buy new properties through a company?
Buying a new property through a limited company is not substantially different from buying it any other way, though it is usually necessary to provide articles of incorporation and other documents, and to set up and use business bank accounts. Happily, most smaller accountants charge as little as £300 per year for basic accounts and filing tax returns if investors are not confident enough themselves in that area.
What about transferring properties I already own into a new company?
This can be done relatively easily, but the goal is to do it without forking out generously for the privilege. The potential for this will depend on your circumstances.
Take the expensive, worst-case scenario first. This is to incorporate the assets by selling them to yourself (from the individual to the company, which happens to be owned by the same individual). This risks incurring capital gains tax on the increase in value since the property was originally purchased (if it exceeds your free annual tax-free allowance of £11,000), as well as stamp duty (including that new 3% increase for investments) on the purchase. This really defeats the purpose and should be avoided.
The conditions for tax-efficient incorporation favour absolute beginners (who have no properties to transfer, as described in the previous section) and professional property moguls (who have many). But they are rather fuzzier for everyone in between, hinging upon whether your existing portfolio already functions like a business, and whether you can prove it.
If you own a vast portfolio of assets that is demonstrably functioning as a buy-to-let business, you may incorporate those assets without incurring any extra charges. The more properties you own the easier it is to convince HMRC, but you must also transfer all of your properties at once.
Legal precedent has recently shown that five properties is an acceptable minimum, but there is no statutory definition or golden rule to follow. Landlords with a handful of properties are also judged by evidence of their personal involvement in the business – for instance, whether they manage selection, upkeep and tenancies themselves (or manage others to manage them).
If landlords in this grey zone are not confident they qualify, they have two avenues to pursue. The first is to enlist professional help to assess the options or enter into correspondence with HMRC. The second is to continue expanding the portfolio and modify future behaviour to demonstrate a greater level of involvement, with a view to applying again at a later stage. It is probably better to wait or not to incorporate at all, than to rush the process and risk heavier taxation.
Depending on your circumstances, incorporating your portfolio could be a slog or a breeze. Whether that is worth the effort depends on what you stand to gain. Next week’s edition takes each type of tax in turn to create a full picture of the risks and rewards of investing through a company.
Disclaimer: tax advice is never one-size-fits-all. The government takes all circumstances and applications on a case by case basis, and so should investors. For help assessing your individual situation, seek bespoke advice from qualified experts.
We partnered with tax expert James Hume of Steel Tax London to create this series. Steel Tax can be reached at 020 3291 1943, or through their website: http://www.steeltax.london. If you have any questions for us about the contents of Tax Tuesdays, feel free to drop me a line at firstname.lastname@example.org.