Tag: Investment

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

How does a lifetime ISA work?

Budget 4

The Budget announced that from 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in.

This is why you should get one!

  1. 25% Bonus – free money is always good
  2. It encourages you to save – building up savings for a house or retirement will definitely be of benefit
  3. The under 40’s will probably see this as better than a pension plan, as you can’t access pensions until you are 55

Personally Pensions are still my favourite…

Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)

40% Tax Rate 20% Tax Rate
Year Pension No Pension % Diff Year Pension No Pension % Diff
1 £10,700 £6,252 71% 1 £10,700 £8,336 28%
2 £22,470 £12,954 73% 2 £22,470 £17,272 30%
3 £35,395 £20,131 76% 3 £35,395 £26,841 32%
4 £49,564 £27,808 78% 4 £49,564 £37,078 34%
5 £65,077 £36,013 81% 5 £65,077 £48,017 36%
6 £82,036 £44,773 83% 6 £82,036 £59,698 37%
7 £100,555 £54,119 86% 7 £100,555 £72,158 39%
8 £120,754 £64,081 88% 8 £120,754 £85,441 41%
9 £142,761 £74,692 91% 9 £142,761 £99,590 43%
10 £166,715 £85,987 94% 10 £166,715 £114,649 45%
11 £192,765 £98,000 97% 11 £192,765 £130,667 48%
12 £221,070 £110,771 100% 12 £221,070 £147,694 50%
13 £251,801 £124,337 103% 13 £251,801 £165,782 52%
14 £285,140 £138,740 106% 14 £285,140 £184,987 54%
15 £321,285 £154,024 109% 15 £321,285 £205,365 56%
16 £360,445 £170,233 112% 16 £360,445 £226,978 59%
17 £402,846 £187,416 115% 17 £402,846 £249,888 61%
18 £448,731 £205,621 118% 18 £448,731 £274,161 64%
19 £498,358 £224,901 122% 19 £498,358 £299,868 66%
20 £552,006 £245,309 125% 20 £552,006 £327,079 69%

Even when you consider:

  • Your money is locked up till you are 55
  • You pay tax when you take money out of the pension
  • You can get 25% out of the pension tax free

The difference in growth is massive

If you do salary sacrifice you can increase the tax effect by saving national insurance too.

steve@bicknells.net

Buy to Let interest relief tax saving ideas

To Let

Restriction of Mortgage Interest Tax Relief

The governments’ plan 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.

What could a Property Investor do to reduce the impact of these changes?

Here are a few ideas….

  1. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  2. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or anther type of commercial property on which the restriction won’t apply
  3. Increasing the Rent – Could you charge more to cover the extra tax?
  4. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  5. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

What do you plan to do when the changes take effect?

steve@bicknells.net

Contact Us

Can you assign your property rents to a company?

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

Contact Us

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

Mosaïque de logements

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

More Tax for Landlords

Mosaïque de logements

The Summer Budget 2015 was not great news for Landlords!

The 10% Wear & Tear allowance will end in April 2016 and landlords will only be able to claim for actual expenditure, this could have a ‘cap’ and restrictions, we await the full details. Many landlords will be disappointed at the loss of this useful tax relief.

From April 2017 tax relief on interest will be restricted so that by 2020 it will not be an allowable expense against profit but will attract 20% tax relief.

steve@bicknells.net

When is a tax deduction allowed on property acquisition?

A donut store, bakery, fish and chips store and a pet shop

Acquisition costs need to split into capital and revenue expenses.

“Several tests have been developed through case law to ascertain whether expenditure is revenue or capital in nature. The ‘enduring benefit’ test, which originated from Atherton v British Insulated & Helsby Cables Ltd [1925] 10 TC 155, is one such test.

“In this case, that expenditure incurred with a view to providing the business with an ‘enduring benefit’ was not allowable as a trading expense. ‘Enduring benefit’ means that the expense will benefit the business not just in the year in which it is incurred, but also in the years that follow. [Taxation]

Capital Expenses

  • Legal costs for the property purchase
  • Property Acquisition Cost

Capital expenses are only recovered as part of the capital gains calculation when they are added to the purchase cost to reduce the overall gain.

Revenue Expenses

  • Mortgage arrangement fees
  • Legal fees on arranging loans
  • Lenders normally include valuation fees in their charges

Revenue expenses are charged to the P&L and are deductible against income tax/corporation tax.

When loan costs are material they would normally be amortised over the period of the loan in order to apply the matching principle of accounting.

You cannot deduct:

  • Expenses incurred in connection with the first letting or subletting of a property for more than a year. These include legal expenses such as the cost of drawing up a lease, agents’ and surveyors’ fees and commission.
  • Any costs of agreeing and paying a premium on renewal of a lease.
  • Fees for planning permission or registration of title on property purchase.

HMRC Guidance

steve@bicknells.net

Why property investors like Micro Entity Accounts

Micro Entity

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

There are approximately 1.56 million micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8 million.

Most property businesses will have less than 10 employees and less than £632,000 turnover.

If you are a property investor filing Abbreviated or Full Accounts you have to report property values at their fair value, which means you tell everyone what you think the property is worth. You may not want to do that, especially if you are planning to sell as it tells the potential buyer what you think its worth and that might be an issue in negotiations.

Under the Micro Entity regime you aren’t allowed to use fair value and have to use Historical Cost. Which most Property Investors will prefer.

No notes are required with Micro Entity Accounts and any advances or financial commitments are shown at the foot of the Balance Sheet, often this is simply the value of the Mortgage outstanding.

steve@bicknells.net

Garden bagging – profit from property development in your back yard

Home Office

The rate of new housing required to meet demand in England is now estimated at between 240,000 and 245,000 units a year, an increase of 10,000 new homes annually on previously accepted figures.

Gazumping and other nasties that flourished in the last property boom are making a return, as competition for homes increases with the bringing forward of the second phase of Help to Buy.

So now could be the time to sell off your garden:

  1. Its a way of building homes without building on the Green Belt
  2. It can be a zero risk way to make money if you sell the plot

Garden Bagging works as follows:

  • Home Owners with suitable land approach a local builder
  • The builder buys the right to seek planning permission for a nominal fee
  • If the application is successful the builder will pay up to 85% of the open market value of the consented plot less his costs

Alternatively you could develop the plot yourself for a typical self build its estimated that 35% would be the land cost, 40% build cost and 25% profit margin.

steve@bicknells.net

Tax Break for Racehorses

Horse racing.

There are around 8,215 racehorse owners in the UK, ranging from gentry to plumbers united in their love of the sport.

But this is not an investment for the faint-hearted. You are unlikely to make a fortune and could end up losing a huge amount of money. The Racehorse Owners Association says that for every £100 of annual outlay (not including the purchase cost of the horse), a racehorse owner is likely to see a return of just £21.

As reported in the Telegraph (12th February 2013)

Some times it can pay off….

Rugby star Mike Tindall was branded an “idiot” by his wife Zara Phillips when he splashed out £12,000 on a racehorse.

But Mr Tindall is now looking far from stupid as his impulse purchase won last month’s Welsh National. Monbeg Dude, which Mr Tindall owns with four others, is now said to be worth more than £200,000.

VAT Tax Break for Racehorses

Following an agreement with the Thoroughbred Horseracing and Breeding Industry a scheme known as the VAT registration scheme for racehorse owners was introduced on 16 March 1993. If you meet the conditions of the scheme HMRC will accept that racehorse ownership is a business activity. You can therefore register for VAT and recover some of the VAT you are charged on your expenses as input tax.

Owners may include:

  • breeders;
  • dealers;
  • trainers; and
  • racing clubs.

You can apply for VAT registration under the scheme if you are registered as an owner at Weatherbys and you:

(a) own a horse or horses covered by a sponsorship agreement registered at Weatherbys; or

(b) own a horse or horses covered by a trainer’s sponsorship agreement registered at Weatherbys; or

(c) can show you have received, and will continue to receive, business income for example from appearance money or sponsored number cloths (SNC’s) from your horseracing activities.

You can recover as input tax the VAT you are charged on the purchase, training and upkeep of a racehorse and any overhead expenses used for the purpose of your business.

steve@bicknells.net