The new tax year has coincided with a period of widespread disruption to the property market, caused by the coronavirus pandemic. However, if you are a buy-to-let landlord, this may be an advantageous time to envelope (incorporate) your portfolio, by transferring your properties into a company.
What are the benefits of enveloping a property now?
For landlords owning property, tax changes in recent years will have their full effect in the 2020/21 tax year. The principal change is the restriction in relief for finance costs, where relief is now only given at the basic rate. Enveloping properties can help to mitigate this impact, but many landlords have either not considered this or have been put off by the costs.
However, if the value of your portfolio has lowered in the current pandemic, you could benefit from cost savings and a reduction in tax liability - making it the ideal time to consider enveloping.
Capital Gains Tax (CGT)
With lower values could come lower capital gains tax. For some landlords, claiming incorporation relief can mitigate CGT, but where this is either not possible or advantageous, selling properties to a company may be prohibitive due to the CGT position. Lower values may mitigate this.
Stamp Duty Land Tax (SDLT)
Where a partnership incorporates a property business, it may be possible to claim relief from SDLT. However, in most instances, property portfolios are not held or managed in a partnership, and the formation of a partnership with the intention of claiming relief from SDLT is not possible.
SDLT rates for incorporation are always subject to the additional 3% for second homes and therefore usually comprise a significant cost – however, lower property values can reduce this greatly.
The current environment for lending involves very low interest rates, especially for lowly-geared portfolios. In recent years, the additional interest cost a company would have on a mortgage would be prohibitive. However as more and more landlords incorporate property, portfolio rates and willingness to lend have increased. It is hard to see that current economic policy will result in anything less than increased pressure for banks to lend to sound businesses.
How can we help?
We’ve built our expertise as property accountants and property tax advisors, working for numerous clients. If you are looking for assistance with your property matters, please contact Andrew Noton firstname.lastname@example.org.