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TIME TO RESTRUCTURE Are residential portfolio landlords suffering from higher rate tax burden? Is it time to incorporate without Stamp Duty Land Tax. Recent changes in legislation mean that, in most cases, it is no longer attractive to acquire buy to let investments in a personal capacity. residential Property IS INCORPORATING THE ANSWER? Whilst an individual may be burdened with a higher tax bill, a company can still offset 100% of its funding costs against rental income. It is not of surprise then that savvy investors are taking the incorporation route for the purpose of their buy to let investments.

WHERE DOES THAT LEAVE BUY TO LET INVESTORS WITH AN EXISTING PORTFOLIO HELD IN INDIVIDUAL NAMES? It is important to realise that a transfer from an individual to a company can attract stamp duty at the higher rate based on the market value of the property, regardless of the amount being paid. In addition, mortgage products tend to be less favourable to companies and, there are other tax consequences to consider.

Over the last 2 to 3 years, Harold Benjamin’s property team have seen a rise in the number of clients taking advantage of partnership relief on incorporation. This allows 100% relief from SDLT and the ability to offset capital gains tax. With the right advice, clever investor clients we work with have put in place a structure to transfer their assets to a company thereby taking advantage of this relief. PARTNERSHIPS When you are looking to incorporate a partnership for these purposes, it is crucial to have a good team of advisors behind you to help navigate the various legal, accounting and mortgage complexities involved. HMRC will be quick to unravel and scrutinise schemes which are not compliant with the relevant legislation.

One of the most crucial elements of this process is that you must be able to establish that a true partnership exists. Whilst this does not necessarily mean all properties need to be jointly owned by the partners, it also does not mean that joint ownership alone would qualify. You cannot simply add your spouse to the title ownership. All partners need to be actively involved with the letting business. You must also show there is a true business. The passive income of 2 or 3 buy-to-let properties is not considered sufficient for these purposes.

Assuming that you are able to establish that partnership incorporation is a viable option, you will need to transfer all of the partnership assets to the company at the same time. This will have its own complexities, which include arranging new mortgages and conveyancing to ensure simultaneous completions take place. Whilst this may be easily managed when portfolio sizes are small, we have some clients with up to 100 properties in their portfolio. The funding options may also be limited. We have seen an appetite for buy to let investor company funding with almost all lenders dispensing with their usual requirement for floating charges for buy to let investments. However, the availability and product range appears to be not as extensive as it is for private borrowers. Our hope is that more lenders pick up on the trend for company borrowing and more competitive deals begin to emerge in the market.

SO WHAT CAN BE DONE FOR THOSE WITH LARGE PORTFOLIOS AND/OR THOSE THAT DO NOT WANT TO SWITCH THEIR CURRENT MORTGAGE DEAL? Setting up a trust or selling the beneficial ownership of the assets simultaneously may be the answer. HMRC recognises that incorporation relief will still apply in these cases. This will avoid your need to refinance and transfer the legal titles of properties simultaneously. It will allow both to take place when it becomes commercially viable, or in some cases not at all. Our expert

MILLI.JONES MILLI.JONES@ HAROLDBENJAMIN.COM HAROLD BENJAMIN SOLICITORS CONCLUSION The government’s rationale behind the buy to let tax changes is that home-owners are unable to offset their funding costs against their income and so why should the buy to let investor be able to? That is something that many buy-to-let investors will disagree with but it is, nevertheless, here to stay for the foreseeable future. Taking into account the above, incorporating may well be an attractive option for buy-to- let investors. But there are a number of issues to consider and instructing good advisors from the outset is essential to avoid being presented with a very large tax bill instead! Individuals holding buy to let properties will find that they are no longer able to offset 75% of their finance costs against rental income. That will rise to 100% in the upcoming tax year and be replaced by a 20% tax credit. This is far less generous for higher rate tax payers who previously received an aggregate 40% tax relief.