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Managing a property portfolio can be a challenge for even the most experienced investor, let alone in the current market climate. With changes to mortgage interest relief set to start affecting rental profits from 2017, plus the increasing stamp duty land tax already proving a barrier to second home-owners, many landlords have been left unsure how to make their investments best work for them.
Property is usually held either by an individual or as a partnership, with a portfolio developing over time into a business. This allows for greater flexibility as far as assets and access to income and capital are concerned, with a reasonably straightforward legal and compliance process to go with it.
However, with the property market and economy changing due to Brexit and new buy to let regulations taking effect, the future of the buy to let market remains uncertain in the long-term. Many investors have been left re-considering the existing ownership structures of their portfolios as a result, in order to find the best way to secure their business and benefit financially.
Changes in taxation have also caused some lenders to change the way they assess mortgages. At Enness, we have witnessed a trend in lenders increasing their rental calculation from 125% at 5% to 145% at 5.5%, resulting in some landlords’ rental income simply not generating enough revenue for them. However, there is a solution, especially for clients with medium to large personal portfolios (but not exclusively) who run their portfolio’s as a business.
Incorporating a property business in a limited company is an option that has become increasingly popular over the past few months. This can be an excellent way for clients with large portfolios to benefit from greater tax efficiency when it comes to income and capital gains tax.
By having an investment property legally owned within a limited company, landlords have the potential to benefit from a better rental calculation as well as tax efficiency, with the rental calculation for the majority of buy to let lenders still 125% at 5%.
Equally, for higher rate or additional rate taxpayers, you have the discretion of how you take income from the limited company, as the company will receive full tax relief on the interest of its mortgage payments. The company will also pay corporation tax on any profit it makes (currently 20% but this will be falling to 18% in 2018-2019), allowing you greater control over how much additional personal tax you pay.
It’s important to note, however, that the consequences of moving properties without being able to claim Incorporation Relief can be unaffordable in terms of Capital Gains Tax. Incorporation Relief is where the taxpayer can automatically offset any existing, chargeable gains against the base cost of the company’s new shares upon incorporating the property. It is critical that the property portfolio is run as an active business, however, for the taxpayer to be able to claim the relief.
This can be extremely beneficial, however, it does require stricter criteria with very specific conditions to be met, so we would always recommend discussing this with an expert broker first.
This increase in demand has prompted lenders to start developing more specific limited company propositions as changes in the market take effect. The sector may face a period of adaptation and greater turbulence, yet lenders remain keen to lend and evolve with it, especially while rates remain extremely low.
As many landlords scramble to put something in place before they are hit by further tax changes, there is likely to be even more of a rush to transfer or purchase properties through a limited company, with many having already done so. We suggest acting sooner rather than later to avoid missing out on the many opportunities currently available.
Despite a generally positive outlook, we would strongly recommend engaging with an expert broker when planning to incorporate your property into a limited company. This article is for information only as your personal circumstances can come with complications and details you may not have considered; our specialist advisers and partners are experts in this area, with the contacts, knowledge and access to give you personalised advice to help decipher the best option for you.