July this year saw the UK Chancellor of the Exchequer, Rishi Sunak, announce a temporary cut to Stamp Duty payments in respect of UK property valued up to £500,000 – a cut that is set to be in place until 31st March 2021 – as part of the UK’s COVID-19 Stimulus Package.
For those with existing UK property portfolios or UK buy-to-let property, it could therefore be the ideal time to look at restructuring the ownership of their property holdings in order to make them more efficient.
Property holding in your individual capacity
Over the past few years, it has become much harder and more costly for owners of a second home. For owners holding their property in an individual capacity, the Government has scrapped many of the advantages that property owners formerly benefitted from, such as mortgage interest relief and wear and tear allowances.
Due to such restrictions coming into force, owning a property by way of a UK Limited Company (‘Property Company’) has become a far better solution for property ownership, as the relief for mortgage interest is not restricted for corporation tax purposes. Additionally, the rate of tax charged on profits is lower and succession planning is simpler.
Why does that matter now?
Transferring properties into a Property Company will normally trigger Capital Gains Tax (‘CGT’) and Stamp Duty Land Tax (‘SDLT’).
However, CGT can be mitigated where the scale and character of the property investment is sufficient to allow the portfolio to be treated as a business. In such cases, incorporation relief can postpone tax charges on any increase in property value prior to the date of incorporation, until the sale of the shares of the incorporated business.
Due to the lower tax on profits enjoyed by companies, greater reinvestment of profits is possible in order to reduce mortgages and grow the business. Although further tax will arise where funds are extracted from the business (usually as dividends), the overall tax paid on those profits should not exceed the tax currently paid by an individual or partner, even with the recently increased tax rates on dividends.
By incorporating a Property Company and structuring your property business in this way, you can:
- continue to offset 100% of the mortgage interest costs against your property income
- pay 17% corporation tax instead of the current 19% in 2020
Exemptions due to COVID-19
SDLT is normally chargeable on the transfer of properties into a Property Company and based on the market value of said transferred property. However, until 31st March 2021, individuals that own property in their own name or that wish to add additional properties to their portfolio, can use the SDLT exemption period to transfer property into a Property Company. In doing so, the SDLT charge will be significantly lower – the SDLT charge is set at 3% surcharge instead of up to 8% for properties valued up to £500k, as is normally the case.
Setting up a Property Company
There are many misconceptions surrounding the difficulties and time required to set up and run a Property Company.
Setting up and maintaining a Property Company does involve a slightly different mind-set than that when acting in an individual capacity, in the same way that being a Landlord also brings with it a number of responsibilities.
Being organised, having the right advisors in place and an understanding of the property market are key to a successful property business.
Our property team have implemented a variety of property solutions, every one different in its complexity but each designed to meet the individual objectives and requirements of the client.
We have developed a wealth of experience and understanding in the acquisitions, maintenance, redevelopment and sale of a broad range of property types worldwide, including serviced apartments, hotels, office buildings, student accommodation, offices, care homes and residential developments.
Working closely with specialist property investment and management companies, professional advisors and a client’s chosen representatives, we look to identify and maximise property development opportunities and to provide our clients with a tailored solution complemented by a range of support services, to ensure that each client’s structure is effective and runs efficiently.
If you would like a free, no obligation discussion about setting up a property company then please get in touch.
