Is a Company the best way forward for Buy to Lets? Reply

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The Summer Budget made this decision even more complicated!

First landlords have a lot to consider..

  1. Transferring their portfolio will probably incur Stamp Duty and Capital Gains
  2. Mortgages can be harder to find and more expensive for companies
  3. Share ownership options and objectives
  4. Company Admin, Accounts and Tax
  5. Capital Gains Allowances, ATED and IHT

But one key advantage is explained by Adrian Benosiglio, real estate tax partner at Baker Tilly (www.yourmoney.com)

For example, Mr Jones (a 45% taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000. Currently he would pay £4,500 income tax on profits of £10,000.

From April 2020, he’ll pay £27,000* income tax. This is calculated by applying his marginal rate of tax to his rental income (£100,000 x 45%) which gives a tax liability of £45,000 and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) which would give tax relief of £18,000. This would leave Mr Jones with a tax bill of £27,000 (£45,000 less £18,000). The end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.

A company is not affected by these measures and therefore would receive full mortgage interest relief. Additionally, corporation tax is charged at 20% and is due to fall to 18% in 2020. Using the above example, a company would pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.

Complicated isn’t it!

steve@bicknells.net

Is Commonhold better than Leasehold for Flats? 1

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Most residential flats are owned on Long Leasholds but this creates tax issues –  Stamp Duty, Capital Gains, Income Tax/Corporation Tax.

Take a look at HMRC Helpsheet 292 and CG70700 to get an idea of Capital Gains Tax issues!

Fortunately ESC/D39 can be applied to Lease Extentions

In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for Capital Gains Tax purposes if the taxpayer so wishes and all of the following conditions are satisfied:

  • the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
  • the transaction is not part of or connected with a larger scheme or series of transactions;
  • a capital sum is not received by the tenant;
  • the extent of the property under the new lease is the same as that under the old lease;
  • the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.

CG71240

The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate Capital Gains Tax consequences.

In 2002, Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). Commonhold can be applied to both Commercial and Residential buildings.

The advantage of commonhold is that it gets rid of the concept of the declining asset – sellers and purchasers of commonhold properties will no longer have to worry about how many years are left on the lease.

Under the commonhold system, all flat owners will automatically be members of a company – the Commonhold Association – that owns the freehold and thus the block.

This means that it should be easier to run the building for the benefit of the flat owners.

However, blocks of flats will still need to be managed.

And as a form of community ownership, commonhold brings with it various tensions.

To alleviate any possible problems, members will have to sign up to a “Commonhold Community Statement”.

This statement will set out all the rules and regulations you normally find in a lease, for example rules about subletting, pets, noise and use of gardens.

Which is better?

steve@bicknells.net