There are many reasons why using a company to invest in residential property is good idea and Summer Budget 2015 made companies an even more attractive option.

1. Restriction of Mortgage Interest Tax Relief

Currently this is just a ‘Policy Paper’ but the 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.

This link shows some worked examples – Mortgages for Business

Most investors will have multiple properties and high levels of borrowing.

Furnished Holiday Lets are excluded from the restriction – Official Policy

2. Corporation Tax Rates

The current rate of Corporation Tax is 20% but its falling year on year and by 2020 it will be 18%.

Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.

Individual tax rates are

Basic rate

20%

Up to £31,785

Higher rate

40%

£31,786 to £150,000

Additional rate

45%

Over £150,001

3. Capital Gains Tax

Capital Gains Tax is at 20% in companies (falling to 18% by 2020) and companies are allowed to apply HMRC Indexation Allowance to offset the effect of inflation.

Individuals get an annual allowance of £11,100 and basic rate tax payers pay 18% with higher rate tax payers paying a massive 28% with no indexation.

There are special rules for UK Companies owned by Non UK Residents.

There is no rollover relief for companies or individuals investing in Residential Property because investment isn’t a trading activity.

4. Stamp Duty

Stamp Duty (SDLT) on selling Shares is 0.5%.

Example – So £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.

Stamp Duty on Property Sales is calculated as follows

• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that

HMRC have a calculator, here is link

http://www.hmrc.gov.uk/tools/sdlt/land-and-property.htm

But you should also consider ATED (Annual Tax on Enveloped Dwellings) – more details in this blog – http://stevejbicknell.com/2014/09/12/more-tax-on-companies-owning-high-value-residential-property/

SDLT is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies (or ‘non-natural persons’). These include:

• companies
• partnerships including companies
• collective investment schemes

The 15% rate doesn’t apply to property bought by trustees of a settlement or bought by a company to be used for:

• a property rental business
• property developers and trader
• property made available to the public
• financial institutions acquiring property in the course of lending
• property occupied by employees
• farmhouses

The standard residential rate of SDLT applies in these cases. These exclusions are subject to specific conditions.

If 6 or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply.

5. Inheritance Tax (IHT) and Potentially Exempt Transfers planning

One of the big benefits of Shares is that its easy to split ownership.

Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.

When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £11,100 to offset this gain.

steve@bicknells.net