From 2020 income tax on buy to let properties will be charged on turnover and credit for tax on mortgage interest will be limited to basic rate tax, currently 20%.
This is being phased in from 2017, so will bite very soon on higher rate tax payers with buy to lets in their own names – but not those who own properties through a corporate vehicle. Companies will still be able to offset the full mortgage interest thereby creating a significant tax differential between the two structures.
The tax change is subject to challenge and on 6th October there is a permission hearing to establish whether the case can be argued in court.
Astute landlords are already preparing for the worst, moving properties from their own names into corporate vehicles. The costs of doing so are not insubstantial, but unless the tax change is struck down the long term benefits for higher rate tax payers are overwhelming.
Done properly, the transfer is tax neutral for capital gains tax and stamp duty land tax; but there are hurdles in the way that can trip up the unwary or catch the poorly advised.
If the transfer is made from a Property Investment Partnership, relates to the whole of that business and is done as a single transaction in return for shares and without any other consideration then there is no CGT and no SDLT payable.
There is a lot in that sentence so we need to pick it apart a little.
Firstly, we need to establish that there is a Property Investment Partnership. Simply owning a buy to let is not sufficient. There has to be a business. In the case of jointly owned property where there has been active management, not merely instructing letting agents to deal with the letting and maintenance, then the structure should qualify. Owners who deal with the advertising, viewings, preparation of documents, handovers and deposits themselves are in the best position to confirm that they are running a lettings business and not just holding investments.
Secondly, the transfer to the corporate vehicle must relate to the whole of the business assets. So it is not possible to cherry pick the best properties or leave behind non-property assets. If the business has been funding an office with equipment, then that too must also be transferred over.
Thirdly, the transfer must be in return for shares and no other consideration. This would prevent, for example, a transfer made at the same time as a refinancing to release some of the equity – for example, a transfer partly for shares and partly for cash. If equity is released it must be done before the transfer to the company.
Assuming all of this is addressed the owners are treated as having acquired the shares at the same price as they acquired the properties. So if properties were bought totalling £1m and at the date of transfer were worth £3m then the shares would have an acquisition value for capital gains tax of £1m. Only when the shares are sold does CGT bite. So a share sale of the company at £3m would trigger a CGT charge on the £2m profit, subject to any other reliefs.
Finally, the rationale is complex but effectively the SDLT charge is zero. Returns are still required but so long as the transaction ticks all the right boxes no payment is required and that is a significant point given the SDLT rates.
A corporate structure should therefore be on the radar of any higher rate tax payers holding buy to let properties.