From April 2017 the Government introduced a new restriction on claim mortgage interest as a cost against residential property letting.
Its being phased in
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
The rules don’t apply to
Companies
Furnished Holiday Lets (which will include Serviced Accommodation if they meet the FHL criteria)
Property Development and Trading
Commercial Property in a mixed use building
The rules do apply to
BTL’s
HMO’s
Partnerships including LLP’s
Individual Landlords
Trustees
What loans will it apply to
Loans taken out to buy residential property for letting
Existing loans and mortgages of a residential landlord
Loans taken out to purchase an interest in a property letting partnership
What costs are within the scope of clause 24
Interest
Finance Costs
Incidental costs such as broker fees and loan related legal costs
How much difference does having a residential investment company make to a higher rate tax payer?
Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are
Industrial units
Offices and shops
Farmland and forestry
Public houses
Nursing homes
Hotels
Marine berth
The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.
If your business owns its premises or you have mixed property investments where you can title split to separate the commercial from the residential it could well be worthwhile to move the commercial property into a pension scheme (SIPP or SSAS).
The tax benefits are:
When you or your business contribute to your pension scheme the contributions are tax free – for individuals they will will get back tax at 20% and can claim additional tax relief on their self assessment return, for companies they can save 20% corporation tax
When the property is in the pension scheme there isn’t any tax on the rental income or capital gains tax if you sell the property
When you retire you could get 25% of your pension tax free
Other benefits include:
Your business could use cash tied up in the premises to invest in trading activities or for other investments
Pensions are normally outside of the scope of inheritance tax
It will ring fence your property from your other activities
In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:
Find a lender prepared to lend a third of the property value to your pension scheme (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
Have the premises independently valued and rent assessed and appoint solicitors
Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
Transfer into your SSAS or SIPP any funds you have in other pension schemes
As you are the business owner and its your pension scheme your business could make a payment into your pension scheme (pension contributions are tax deductible), the maximum for the last 3 years would be £120k (£40k + £40k + £40k) see details of NRE
You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
Then your pension scheme buys the premises from your business and rents it back to the business
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:
A Charge over the Property – these are legal charges registered at Companies House
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
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
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.
During October to December 2016, 69% of all new Buy to Let purchase applications were made by Limited Companies according to Mortgages for Business.
The percentage of remortgage applications in company names also increase to 31% in Q4 up from 23% in Q3 last year.
The total number of lenders offering Buy to Let finance to limited companies remained stable at 14 and the total number of products available rose slightly from 195 in Q3 to 198 in Q4.
This is despite the fact that lenders are still charging higher rates of interest for companies, often 1% extra.
I think lenders will very soon be forced to bring rates into line as competition amongst lenders increases.
The main driver has been the 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 company
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 20% and falling which means if you want to grow you portfolio you will retain more of the profit for re-investment
Companies have to be the way forward for investors.
There is encouragement from the government for people to become self-employed and at first it seems attractive, especially if you have recently become unemployed or redundant. Although one of the main attractions of becoming self-employed is no longer having to work for somebody else there are several disadvantages you should consider. These include not being certain of having a regular income, having to arrange your own sick pay and pension and probably having to work long hours.
What should you do before you start your business?
Create a Business Plan – research shows it will increase your profitby 20%
Create a cashflow forecast – work out how muc money you will need to run your business and where you will get the funding from
Choose the right structure – its important to consider carefully whether to be a Sole Trader, Partnership or Limited Company
Talk to an Accountant – Accountants will help you register and set up your business and avoid the risk of penalties
Market Research – is there a market for your product or service, how big is the market and why will customers buy from you
I have often heard sole traders say that it will cost too much to become a limited company. This is because many sole traders prepare their own accounts and do their own self assessment returns and are unaware that the cost involved in becoming a limited company really aren’t that high.
What is a Limited Company?
A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
The Incorporation Spreadsheet created by Practice Track is an Excel spreadsheet which shows the tax savings that are available to sole traders and partnerships if they chose to incorporate. It can also be used for incorporated clients to compute the taxes payable under the new dividend regime.
It is therefore a useful tool to use for planning purposes for clients who are already incorporated and can reinforce the point to many clients that they are still saving tax by being incorporated.
It also caters for salary and dividend profit distribution between multiple director-shareholders (up to six).
The detailed output sheets are not password protected so you can insert extra calculations or override the formulae if you wish.
Often using an agent will mean the company is formed quickly, sometime within a couple of hours.
There are three different ways in which the sole trader can be incorporated. It’s highly likely that Incorporation Relief will be the best way to incorporate in most cases, however, it is worth considering all the options when advising clients.
These are:
Incorporation Relief
Incorporation Tax will apply automatically unless the transferor elects for it not to in writing.
To benefit from Incorporation Relief the business will need to be valued at open market value including Goodwill prior to transfer to the limited company
There are 3 conditions which must be satisfied before incorporation relief can be claimed:
The business transferred must be a going concern;
All assets owned by the business (except cash) must be transferred to the limited company.
The consideration paid for the business assets must be wholly or partly in shares.
Example You transfer your business in return for shares worth £100,000. You make a profit of £60,000. You later sell the shares and need to work out the gain – their cost for your Capital Gains Tax calculations is £40,000 (£100,000 – £60,000).
Example Your business is valued at £100,000 when you transfer it, and you receive 80% in shares (£80,000) and 20% in cash (£20,000). You made a gain of £50,000. You can postpone 80% of the gain (£40,000) until you sell the shares. You need to pay Capital Gains Tax on 20% of the gain (£10,000) in your next tax return.
The official helpsheet with further advice is HS276.
Holdover Relief
Holdover relief applies when business assets are transferred from an individual and avoids capital gains on the chargeable assets becoming immediately liable to capital gains tax.
Example
You sell a shop worth £81,000 to your brother for £40,000. It cost you £23,000. Include the £17,000 gain (£40,000 minus £23,000) when you’re working out your total taxable gain.
This method is useful if you want to keep a property outside of the company and prefer instead for the company to pay a rent for the property. This will have certain tax advantages but it is important to note that this can mean that the owner will lose entitlement to entrepreneurs’ relief on the property, because the property would then be regarded as an investment property.
Selling your Sole Trader Business to your Limited Company
Until December 2014, this was often the preferred option because Entrepreneurs Relief could be applied to gains and in many cases the company could write down the Goodwill against Corporation Tax.
However, this option could still be worth considering.
Let’s take a typical scenario:
Mr Smith has been running a small garage for a few years
he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
at the time of incorporation, the goodwill of the business is valued at £11,100
Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £11,100 which, after deducting the annual CGT exemption (£11,100 2015-16) the company will pay
the acquisition of goodwill is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In Summary
These considerations all show that incorporating a sole trader business is not only straightforward but can also greatly benefit the sole trader client both financially and in the potential flexibility it can provide for their business.
Following a sentencing hearing at Milton Keynes Magistrates’ Court on 8 January 2016, Mr William To, a company director from Beaconsfield in Buckinghamshire, has been sentenced to 33 weeks imprisonment after pleading guilty to 3 counts of failing to preserve company books and accounting records for a period of 3 years, for three separate restaurant management companies.
Mr To’s conviction follows an initial investigation by the Insolvency Service and a full criminal investigation and Prosecution by the Department for Business Innovation and Skills (BIS).
The three BMBQ Ltd, ,Shef Ltd and Broads Cat Ltd, based in Sheffield and Birmingham, went into liquidation with an as-yet-unpaid combined debt of £302,105.89 to HMRC.
The investigation found the director had failed to ensure the companies’ were in order, as such, they could not be delivered up to the liquidator as required.
The Companies Act 2006 states
Section 386 Duty to keep accounting records
(1)Every company must keep adequate accounting records.
(2)Adequate accounting records means records that are sufficient—
(a)to show and explain the company’s transactions,
(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(3)Accounting records must, in particular, contain—
(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b)a record of the assets and liabilities of the company.
(4)If the company’s business involves dealing in goods, the accounting records must contain—
(a)statements of stock held by the company at the end of each financial year of the company,
(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and
(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.
Section 388 Where and for how long records to be kept
(1)A company’s accounting records—
(a)must be kept at its registered office or such other place as the directors think fit, and
(b)must at all times be open to inspection by the company’s officers.
(2)If accounting records are kept at a place outside the United Kingdom, accounts and returns with respect to the business dealt with in the accounting records so kept must be sent to, and kept at, a place in the United Kingdom, and must at all times be open to such inspection.
(3)The accounts and returns to be sent to the United Kingdom must be such as to—
(a)disclose with reasonable accuracy the financial position of the business in question at intervals of not more than six months, and
(b)enable the directors to ensure that the accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(4)Accounting records that a company is required by section 386 to keep must be preserved by it—
(a)in the case of a private company, for three years from the date on which they are made;
(b)in the case of a public company, for six years from the date on which they are made.
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
The consultation is focusing on Capital Gains Tax (CGT) ways to extract money from companies to create Target Anti Avoidance Rules (TAAR) covering:
A disposal of shares to a third party
A distribution made in a winding up
A repayment of Share Capital including Share Premium
A valid purchase of own shares in an unquoted company
Here are the examples of ‘problems’ HMRC want to resolve, Example 1 is ‘moneyboxing’ and/or ‘phoenixism’ and sometimes involves ‘special purpose vehicles’
Example 2 involves creating a holding company…
The consultation ends on the 3rd February 2016, the results are likely to be controversial!
It’s not uncommon for Directors personal expenses to get mixed up with business expenses, for example the director is out buying things for the company and picks up some items for themselves at the same time and it goes on the same bill.
In a perfect world the Director would just repay the cost of personal purchases to the company, but we don’t live in perfect world, so what are the options?
Directors Loan Account
You could post the cost to the Directors Loan Account. These accounts are normally repaid when the Director is paid either salary or dividends.
If the loan is not cleared by year end then the company will have to pay a temporary corporation tax charge of 25% and reclaim the tax when the loan is repaid using form L2P
There may also be a notional amount of interest (4%) charged as a benefit in kind on the loan.
Benefit In Kind
You could have the expenses as a benefit in kind, some benefits may even be tax free, here is a list of my favourite tax free benefits
Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
