Can you assign your property rents to a company? 1

To Let

This is a hot topic at the moment, here is the scenario…

You own a Buy to Let property personally but want to assign the rent to a specifically created company which you own. You are a higher rate tax payer where as Corporation Tax is 20%.

You want to retain ownership personally. You can’t transfer the property to company because Capital Gains Tax and Stamp Duty would apply. Incorporation Tax Relief isn’t available.

Can the Rents be assigned?

Rents

There isn’t a tax rule that says you must lease a property at Market Rent, so in theory, you could create a lease to your company for a period to match the letting period the company will give to its tenant and charge the company a nominal rent.

There are some issues with this for example PIM2220

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes ( PIM2010).

Another potential problem is the mortgage which will be in the Landlords name, not the Company name, so the rent would have to cover the mortgage payments, which means it won’t help with the new interest restrictions coming in soon.

SDLT

This will be a connected party lease and subject to SDLT at market value but as the period will be short its unlikely that SDLT will be payable.

However (SDLTM17035), the renewal of a lease will not be treated as linked with the original lease at all for stamp duty land tax (SDLT) purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:

  • expired naturally
  • contained no right or compulsion of either party to renew and/ or
  • was renewed following entirely new negotiations, as would apply to a new tenant.

Otherwise, where leases of the same premises are granted:

  • between the same or connected parties
  • to take effect one immediately after the other
  • whether at the same time or not

these are successive linked leases for SDLT purposes, with tax calculated under the provisions of FA03/SCH17A/PARA5. Refer to SDLTM17040 for details.

Other Problem Areas

  • The company will be a closed company so if it carried out improvements to the property these could be taxable benefits to shareholders
  • Once the company has the rents and the profits how will you extract them tax efficiently

steve@bicknells.net

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What is the new Innovative Finance ISA? April 2016 Reply

crowdfunding concept

The Government like Crowdfunding and Peer-to-Peer Lending, so in April 2016 the Innovative Finance ISA is being introduced.

In summary, its aim is to increase the number of loans available through crowdfunding by giving a tax incentive to those providing the money. There is greater risk for investors as their investments won’t be brought into the Financial Services Compensation Scheme but the returns for investors will be much higher than traditional savings accounts.

Innovative Finance ISAs are expected to be available from 6 April directly through peer-to-peer lending platforms such as Zopa, Ratesetter and Funding Circle, or via selected fund platforms. They will have the same annual savings limit as regular ISAs, £15,240.

steve@bicknells.net

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If you are self employed have you tried the HMRC Simplified Expenses Checker? Reply

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Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs.

You don’t have to use simplified expenses. You can decide if it suits your business.

Simplified expenses can be used by:

  • sole traders
  • business partnerships that have no companies as partners

You can use flat rates for:

  • business costs for vehicles
  • working from home
  • living in your business premises

You must calculate all other expenses by working out the actual costs.

Costs you can claim as allowable expenses

These include:

Use this checker to work out which method is best for you.

What you need to know:

  • you’ll be asked to make estimates about some of your business expenses – you don’t have to give accurate amounts
  • this checker doesn’t give exact figures to use in your tax return, it gives you an idea of which way of calculating your expenses might be best for you
  • limited companies aren’t eligible

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Start now

steve@bicknells.net

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Can a Residential Property Investor use Incorporation Tax Relief? 2

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There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.

Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!

In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.

The key problem area is the Property Investment is generally not considered to be a Trade.

Some of the issues were resolved in EM Ramsay v HMRC [2013] UKUT 0226 (TCC)

Mrs Ramsey carried out the following activities

  1. Mr & Mrs Ramsey personally met potential tenants
  2. Mrs Ramsey check the quarterly electric bills
  3. Mrs Ramsey arranged insurance
  4. Mrs Ramsey arranged and attended to maintenance issues (drains)
  5. Mrs Ramsey and her son maintained the garages and cleared rubbish
  6. Mrs Ramsey dealt with post
  7. Mrs Ramsey dealt with fire regulation issues
  8. Mrs Ramsey arranged for a fence to be erected
  9. Mrs Ramsey created a flower bed
  10. Shrubs were pruned and leaves swept
  11. The parking area was cleared of weeds
  12. The flag stones were bleached
  13. Communal areas were vacuumed
  14. Security checks were carried out
  15. She took rubbish to tip
  16. She cleaned vacant flats
  17. she helped elderly tenants with utilities

This work equated to at least 20 hours per week and Mrs Ramsey had no other employment.

It is because she did the work herself that her property investment was considered a ‘Business’ and eligible for Incorporation Tax Relief. In summing up the Judge said…

Ramsay

 

If Mrs Ramsay had employed a Property Management Company or Letting Agent to do the work she would NOT have been able to claim ‘Incorporation Tax Relief’.

Most Buy to Let Landlords with one or two properties are Passive Investors who delegate all the responsibilities to professional letting agents, they will not be doing enough to comprise a business!

Steve@bicknells.net

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