Why having a separate company for each property investment is a good plan

Real estate industry

Firstly, we all know there are many advantages to using a company for property investment.

The main driver has been the S24 Restriction of Mortgage Interest Tax Relief

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 taxpayers 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.

Companies have many other advantages too:

  • Stamp Duty on Shares is 0.5% so if you own each property in a separate company you can sell the shares rather than selling the property
  • Holding properties in separate companies makes it easier for lender to take a charge over the business assets
  • Companies are better for Inheritance Tax Planning enabling the company shares to be given away in stages
  • Corporation tax is 19% and falling which means if you want to grow you portfolio you will retain more of the profit for re-investment

Those investors moving an existing portfolio will probably have to move all the properties to a single company in order to benefit from S162 Incorporation Tax Relief.

Let’s look at some of key points in more detail

Mortgages

At the moment company mortgages are probably 1% more expensive than individual Buy to Let Mortgages but that is is bound to change as more people switch to companies.

Lenders will probably want:

  1. A Charge over the Property – these are legal charges registered at Companies House
  2. A Debenture – these are charges over all the companies assets for example cash and rent arrears – this is fine if its one property per company but impossible if you have multiple properties and multiple lenders in a single company
  3. A Personal (Directors) Guarantee – where you have a group structure a Parent (Holding) Company guarantee will probably be a good option if you have to give a directors guarantee you can insure against the risk of it being called in for example http://www.pgicover.co.uk/

The mortgage is with the company, so if you want to sell an investment I think buyers will be interested in buying the company as it avoids re-financing costs.

Bank Charges

Banks will charge for each account and companies need their own bank account, but generally the cost is low, for example

https://www.lloydsbank.com/business/retail-business/rates-and-charges.asp

http://www.santander.co.uk/uk/business/current-accounts/business-current-account

Holding Company

The Holding Company can provide management services to the subsidiaries and also recharge shared costs.

It can lend money and get dividends from the subsidiaries (this would be Franked Investment Income so its not double taxed).

The Holding Company could employ staff.

Accountancy

We offer deals to make this structure costs effective, I am sure other accountants will too. The subsidiaries should be cheaper to operate than the holding company.

Tax Simplicity

In addition to Residential Investments and HMOs you might have Rent to Rent, Commercial, Development and Serviced Accommodation, keeping these in separate companies makes it easier to deal with Tax and Risks, for example some might be VAT registered where as others might be Exempt.

Stamp Duty

SDLT on Shares is 0.5% but its much higher for buyers who buy properties.

steve@bicknells.net

What does your accountant know about property investment and tax?

To Let

Property Investment is probably one of the most complicated tax and accounting activities that exists, it can involve:

  • Stamp Duty (SDLT)
  • Income Tax
  • Corporation Tax
  • ATED
  • Capital Gains

And some activities also involve Pensions, Capital Allowances, VAT, CIS…. the list goes on and on

The internet is full of experts but often their advice is conflicting and some of the advice is actually wrong!

Experience gained from working with investors is the key to knowledge and continuous training and updating is vital. We have written hundreds of blogs on tax and accounting.

One of the biggest recent changes is Section 24 restricting interest relief

Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

The rules don’t apply to companies

I also think that having actual property and construction experience is beneficial.

Back in 2003, we started investing in property with a group of friends and colleagues.

We started by forming a limited company and our first purchase was 3 shops (eastern Eye, Maximum and LMJ) with 8 HMO’s above, there is a picture below

510

We then went on to buy 6 shops with flats above on long leaseholds, we did a title split and put 3 of the shops into SIPP Pensions

691

We then formed another company and purchased a block or 7 HMO’s.

We also bought an Office Block, Industrial Unit and Shops into SIPP and SSAS pensions.

We sold our investment in the companies and focused on commercial property investments in pensions.

steve@bicknells.net

When do you pay Capital Gains Tax on a Property Sale?

One family house for sale

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

So it doesn’t apply to Property Developers, their profits are trading income not investment income.

Disposing of an asset includes:

If you sell a property that your have lived in you will probably qualify for Principle Private Residence Relief

How does Principle Private Residence Relief work?

Even it it wasn’t your Principle Private Residence but you did own it personally you will still get an allowance of £11,100 tax free.

Companies get an indexation allowance

Capital Gains Tax for Companies

Residential properties don’t qualify for business asset rollover relief.

Once you have worked out your gain, the choices for individuals are:

Report your gain and pay straight away

You can use the Report Capital Gains Tax online service for the 2016 to 2017 tax year (6 April 2016 to 5 April 2017) if you’re a UK resident.

You’ll need a Government Gateway account – you can set one up from the sign-in page.

You don’t need to wait for the end of the tax year – you can use this service as soon as you’ve calculated your gains and the tax you owe.

Report in a Self Assessment tax return

Use Self Assessment to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment by 5 October following the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

Report Company Capital Gains in a Corporation Tax Return

Report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay depends on any allowances and reliefs you claim.

steve@bicknells.net

How Bespoke Monitoring will save accountants time and money!

Network / Security Operations Center (NOC / SOC)

We take the Anti Money Laundering and Counter Terrorism requirements very seriously, like all accountants, we carryout risk assessments on clients, check for sanctions, PEPs, and have KYC procedures.

As part of these procedures most accountants will do annual reviews on their clients as individuals and businesses to update their risk assessments but are annual reviews enough? a lot can change in a year

What if there was a better way?

We already use Creditsafe for Business Checks, AML and Compliance Checks which cover

  • PEP
  • Sanction – current
  • Sanction – previous
  • Financial regulator
  • Law enforcement
  • Disqualified director
  • Insolvent
  • Adverse media
  • Corporate registry

They now have a new service, Bespoke Monitoring, we have just signed up to the service.

Everyday they will now:

  1. E Mail us any changes to our clients
  2. Send us a daily spreadsheet for Companies showing any change in status including CCJ’s, Scores, Payment Patterns
  3. Send us a daily spreadsheet showing any changes in Compliance such as Sanctions

What this means is that:

  • We will always be up to date and can update risk assessments as frequently as necessary
  • We don’t need to have a rolling schedule of checking to do – that will save us a lot of time (and time is money)

steve@bicknells.net

If your accountant prepares your self assessment return is there a taxable benefit?

Tax Return Mailing Income Envelope 3d Illustration

Over the years I have heard lots of comments on this, some say a tax return is a personal expense some say its a business expense if the cost is incidental to the accounting work.

For example, lets consider a sole trader, he has to prepare accounts and the only way to report the tax due is on a self assessment return. In many cases the only entries will be the self employed boxes.

Company Directors are probably only doing self assessment returns because they are directors and only the Salary and Dividend boxes will be completed.

We actually specify on our engagement letters to clients who have a businesses that we will complete the Self Assessment Return for Free (FOC) as part of an overall package of fixed fee services.

HMRC guidance states [BIM46450]

There is, however, a longstanding practice of allowing normal recurring legal, accountancy etc expenses incurred in preparing accounts, or agreeing the tax liability, see Statement of Practice SP 16/91 reproduced at EM3981. This has been approved by the courts as a reasonable response to the practical difficulties of apportionment…

It is the practice to allow, in computing profits assessable under Part 2 Chapter 4 of ITTOIA 2005 and under Case I & II Schedule D for companies, the normal accountancy expenses incurred in preparing accounts or accounts information and in assisting with the self assessment of tax liabilities.

So having just started working with Croner Taxwise for client tax investigation insurance, I gave them a call to check the rules and in summary, if the Self Assessment is incidental to the main accounting and tax work then it isn’t a benefit in kind and a separate fee does not need to charged (or assessed) to the business owner.

However, if the client doesn’t have a business, or has complicated tax affairs including capital gains, then they should pay a fee personally.

Equally you can’t claim accountants fees if you are an employee who has to do returns as these are clearly standalone costs and not required as part of your employment as explained in this case – Peter Figg v HMRC TC03703 16th June 2014.

On another note Tax Investigation Insurance is not a tax deductible expense, the reason for this is that you can only claim it as an expense if you are successful in any investigation, if HMRC are successful the fee is non deductible for tax. As you don’t know when or what you might be investigated for its impossible to say whether you will be successful so the best advice is not to deduct the cost against taxable income.

steve@bicknells.net

 

Is your Expense Checking System up to scratch?

Angry tax inspector looking serious and determined

HMRC have guidance in EIM30275 and EIM30270 which set out what they expect, so for example, this is what they expect the expense checking process to be for a one man company

Model D – One man company

Single employee of a one man company working at a series of temporary workplaces. Claiming benchmark scale rates.

Employee maintains a diary and time sheet to confirm occasions when travelling in the performance of their duties and retains receipts in respect of subsistence costs.  An independent third party performs regular monthly checks on a sample of the employees’ records to confirm that the relevant conditions for the exemption were met on each occasion. Checks are performed at random and the employee does not know in advance which journeys will be checked.

Independent third party would generally mean your accountant, but as HMRC encourage people to file themself many One Man Companies won’t have an accountant, so who does the checking then?

Lets see what bigger companies need to do?

Model C – Small employer

Small employer with less than 100 employees who regularly travel in the duties of their employment. Employer pays benchmark rates

Employer checks a random 10% of all claims.  Checks to be independently checked and authorised, and vouched by reference to employee diaries, work schedules and time sheets to confirm that employees were travelling in the performance of their duties on the date of the claim, and receipts to demonstrate that employees had in fact incurred costs whilst travelling. Employees should be aware that they might be subject to review at any time, and not be given notice that any particular claim will be subject to review.

The employer will have to be able to satisfy HMRC that their 10% sample really is a random one – for example, every 10th claim received.  HMRC will accept the evidence produced by such an exercise as being random for the purposes of confirming that employees meet the qualifying conditions for payment of the scale rate.

Employees required to retain receipts for a period of twelve months from the date of expenditure.

I think for small employers this would probably work and is achievable.

What system do you use? Do you think HMRC would accept your system?

steve@bicknells.net

The future is Digital, but we aren’t ready to Make Tax Digital yet!

b1854df8-4af2-474b-b2ae-fd20bfa3f1bb

On 14 December 2015, HMRC published a “roadmap” showing that the new process known as ‘MTD Making Tax Digital’ would be mandatory for most businesses:

“By 2020 most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and update HMRC at least quarterly via their digital tax account. These changes will be introduced for some businesses from April 2018, and will be phased in by 2020, giving businesses time to adapt.”

Accountant’s have been saying for sometime that 2018 is too ambitious and the £10,000 threshold is too low.

The House of Commons Treasury Committee now agree that 2018 is too soon and feel it should be 2019 or later.

One of the big areas of concern has been over the quarterly tax reporting requirements and concerns over data accuracy.

Data accuracy is going to be critical, are most businesses up to providing data in real time? RTI has worked for payroll but could it really work for accounting information? many businesses rely on their accountants and book keepers to get the information correct.

The relationship between UK Taxpayers and HMRC is a good one, the vast majority of UK taxpayers want to pay the right amount of tax and the UK tax gap is already one of the lowest in the world. HMRC could lose that trust by rushing MTD.

Software is also a big issue, with the threshold at £10,000 even very small businesses will need specialist software to cope with MTD and spreadsheets will not be able to cope.

It’s time to take a slower more considered approach.

steve@bicknells.net

What if you can’t afford to pay your tax bill?

No money concept

Some tax payers are great at saving up and keeping money aside to pay their tax bill, but many aren’t!

What can you do if you can’t pay?

You could ask HMRC for help

You may be able to either:

  • get more time to pay
  • pay your bill in instalments by direct debit
  • Telephone: 0300 200 3835

  • Opening times:

    8am to 8pm, Monday to Friday
    8am to 4pm, Saturday and Sunday

Another option might be to use Credit Cards, you may be able to get a 0% credit card or pay and then transfer to 0%

https://www.uswitch.com/credit-cards/credit-card-balance-transfers/

This might be easier, better and cheaper than spreading payments with HMRC.

steve@bicknells.net

 

Only 8 days left to file your Self Assessment! don’t panic

Red help button concept.

Over 4 Million Self Assessment Returns (over 40%) will be filed in January 2017, last year the 29th January saw the highest level of filing with 50,358 returns filed between 2pm and 3pm on that day!

Its likely that many of those who haven’t yet filed their 5th April 2016 returns will either start to panic now or the panic will set in and increase in the next few days.

Here are some things to ease that panic.

What if you don’t have all the information you need for the return?

Returns which include provisional or estimated figures should be accepted provided they can be regarded as satisfying the filing requirement.

  • A provisional figure is one which the taxpayer / agent has supplied pending the submission of the final / accurate figure
  • An estimated figure is one which the taxpayer / agent wishes to be accepted as the final figure because it is not possible to provide an accurate figure for example where the records have been lost. The taxpayer is not required to tick box 20 of the Finishing your Tax Return section of the return page TR 6 (or equivalent in a return for an earlier year) where estimated figures have been used

HMRC SAM121190

Is there a reasonable excuse as to why you can’t file the return?

Here are some excuses that HMRC have accepted

  1. a failure in the HMRC computer system
  2. your computer breaks down just before or during the preparation of your online return
  3. a serious illness, disability or serious mental health condition has made you incapable of filing your tax return
  4. you registered for HMRC Online Services but didn’t get your Activation Code in time
  5. it was lost in the post HMD Response International v’s HMRC 2011 The accountant produced a contemporaneous note in his office diary for 16 May showing that he had filed the return.

What if you make a mistake?

If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct or amend it.

What if you don’t know where to send the payment?

For all those struggling to work our whether to make a bank transfer to HMRC Shipley or Cumbernauld

Your payslip tells you which HMRC account to use. If you’re not sure, use HMRC Cumbernauld. You must use your UTR as the payment reference.

Sort code Account number Account name
083210 12001039 HMRC Cumbernauld
083210 12001020 HMRC Shipley

If you make a Faster Payment this will clear the same day if the amount is within your bank’s limits.

https://www.gov.uk/pay-self-assessment-tax-bill

What if you don’t know how much to pay because of payments on account?

You can check the amount by logging onto HMRC or by asking your accountant to check with their Agent Login.

If you make payments on account you will have made payments in January 2016 and July 2016 towards the final payment to be made in January 2017.

What are the penalties for missing the deadline?

HMRC have tool to help you estimate the penalties and interest

https://www.gov.uk/estimate-self-assessment-penalties

steve@bicknells.net