TT247: Incorporating Residential Property Portfolios
New measures to restrict relief for finance costs on residential properties to the basic rate of Income Tax will be introduced gradually from 6 April 2017. Together, with falling rates of Corporation Tax this has made the holding of property portfolios through a corporate entity very appealing for some people.
Unfortunately, transferring a property portfolio from one’s own name or names to a company can give rise to two rather significant issues. The first being that most property portfolios are likely to be pregnant with considerable amounts of gain. The transfer of such properties to a company the individual holds will be deemed to take place at market value and therefore these gains will crystallise and become chargeable to Capital Gains Tax (“CGT”) at rates up to 28%. The second issue is that of Stamp Duty Land Tax (“SDLT”), once again if a company acquires a property from a person who is connected with it, a market value charge will generally arise under FA 2003, s53 unless one of the exceptions in s54 or a relief applies. Given the new SDLT surcharge of 3% which applies to companies (as well as individuals already holding a property) and the likely value of the property portfolio being transferred, this is likely to be substantial.
Fortunately, there are solutions to these issues. The solution to the CGT issue lies within s162 TCGA 1992 in conjunction with the upper tier tribunal case of Elizabeth Moyne Ramsey v HMRC. In this case our heroine successfully argued that residential property letting is a business for the purposes of the aforementioned roll over relief. Therefore, by claiming this relief we can arrest the crystallisation of the gains providing the properties are transferred into the company in exchange for shares. Furthermore, if the company was to decide to sell the properties which had been transferred to it, the base cost of the properties in the hands of the company would be the market value at the date they were transferred in. Therefore reducing any taxable gain for the company.
The SDLT problem is one which is slightly more troublesome. However, once again it is one to which there may be a solution. Quite often, property portfolios are held by husbands and wives, other family members or business partners. Effectively, the individuals will be in partnership together running a property letting business. It may be that this partnership has not yet been formalised, however, this is easily rectified. The solution to which I make reference can be found by reading on into the FA 2003 and presents itself in the form of a type of ‘computational relief’. Without boring you with the details, the relief serves to reduce the rate of SDLT on the transfer of the properties into the company from the partnership to 0%.
Finally, although this may not always be the ‘driver’ for incorporating a property portfolio, it does serve as an excellent opportunity to take stock and partake in some Inheritance Tax Planning, the rates of which dwarf any of the taxes we have previously discussed.
If the above interests you, and it is by no means the right solution for everyone, please get in touch with us at Barnes Roffe LLP and we will be delighted to discuss your needs and wishes and how we can help you achieve what you want in the most tax efficient possible way.
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