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The Summer Budget made this decision even more complicated!
First landlords have a lot to consider..
- Transferring their portfolio will probably incur Stamp Duty and Capital Gains
- Mortgages can be harder to find and more expensive for companies
- Share ownership options and objectives
- Company Admin, Accounts and Tax
- Capital Gains Allowances, ATED and IHT
But one key advantage is explained by Adrian Benosiglio, real estate tax partner at Baker Tilly (www.yourmoney.com)
For example, Mr Jones (a 45% taxpayer) has a house with net rental income of £100,000 and mortgage interest of £90,000. Currently he would pay £4,500 income tax on profits of £10,000.
From April 2020, he’ll pay £27,000* income tax. This is calculated by applying his marginal rate of tax to his rental income (£100,000 x 45%) which gives a tax liability of £45,000 and offsetting this with tax relief claimed on the mortgage interest at the lower amount of 20% (90,000 x 20%) which would give tax relief of £18,000. This would leave Mr Jones with a tax bill of £27,000 (£45,000 less £18,000). The end result would be an overall annual loss after tax of £17,000, with insufficient cash flow to make repayments on his loan.
A company is not affected by these measures and therefore would receive full mortgage interest relief. Additionally, corporation tax is charged at 20% and is due to fall to 18% in 2020. Using the above example, a company would pay £2,000 currently and £1,800 from 2020; leaving sufficient funds to make repayments.
Complicated isn’t it!
It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!
Sole Trader Example
The personal tax allowance is currently £10,600 (2015/16)
Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.
It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.
Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.
Companies can claim capital allowances in any of the following 3 tax years.
There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/
I often get asked for ‘Rules of Thumb’ for small businesses, so I have searched the internet and compiled this list, do you agree with the ‘Rules’?
Rules of Thumb are just a starting point and many other factors need to be considered in valuing a business, it also worth considering HMRC’s views (not so good for Chefs and Hairdressers)..
Any goodwill attributable to the personal skills of the proprietor, for example the personal skills of a chef or a hairdresser, will not be transferred to the new proprietor. Advice should be obtained from the CG Technical Group if it is claimed that the goodwill attributable to the personal skills of the proprietor have been transferred with the business because his/her services have been retained for the foreseeable future by means of an employment contract. All of the relevant facts and circumstances should be established before referral to the CG Technical Group.
Basically HMRC disallow Input VAT relating to Investments.
The most well known example of this was when BAA purchased Airport Development Investments Limited in June 2006, the decision was upheld by the Court of Appeal in February 2013.
The BAA VAT group sought to recover the VAT (£6.7m) incurred on the acquisition costs but recovery was refused by HMRC on the basis that they considered ADIL had not made onward taxable supplies, had not demonstrated any intention to make taxable supplies and was not a member of the VAT group at the time costs were incurred.
BAA used an SPV (Ferrovial) to purchase ADIL but did not bring the SPV into the BAA VAT Group until September 2006, 3 months after the acquisition.
The lessons to learn from this are:
- Once you have successfully made the acquisition join a VAT Group immediately and make it clear in correspondence that the SPV intends to join the VAT Group at the earliest opportunity
- Consider not using an SPV
- Buy the Assets instead of the Shares
- Show that the SPV will make taxable management charges
- Consider the scope of the advisors work, HMRC may disallow advice focussed on passively holding shares
Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.
ATED is a tax payable by companies on high value residential property (a dwelling). It came into effect from 1 April 2013 and is payable each year.
Budget 2014 announced a reduction in the threshold from £2 million to £500,000 to be introduced over 2 years. From 1 April 2015 a new band will come into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. From 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500.
Chargeable amounts for chargeable period 1 April 2014 to 31 March 2015
|Property value||Annual chargeable amount 2014 to 15|
|More than £2 million but not more than £5 million||£15,400|
|More than £5 million but not more than £10 million||£35,900|
|More than £10 million but not more than £20 million||£71,850|
|More than £20 million||£143,750|
There are reliefs that might lead to you not having to pay any ATED. You can only claim these by completing and sending an ATED return.
A dwelling might get relief from ATED if it is:
- let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
- part of a property trading business and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- part of a property developers trade where the dwelling is acquired as part of a property development business the property was purchased with the intention to re-develop and sell it on and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee’s duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
- a farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner
- a dwelling acquired by a financial institution in the course of lending
- owned by a provider of social housing
Alternatively in some cases it might be better to own the property as an individual or jointly with other individuals.
As joint tenants (sometimes called ‘beneficial joint tenants’):
- you have equal rights to the whole property
- the property automatically goes to the other owners if you die
- you can’t pass on your ownership of the property in your will
- you can only sell or remortgage the property with the other owners’ agreement
Tenants in common
As tenants in common:
- you can own different shares of the property
- you can pass on your share of the property in your will
- you can stop one owner from selling or remortgaging the property without the other owners’ agreement
The main source for this blog was HMRC
In the Autumn Statement 2013 it was announced that a CGT charge will be introduced from April 2015 on ‘future’ capital gains made by non-UK residents disposing of UK residential property. George Osborne said…
“Britain is an open country that welcomes investment from all over the world, including investment in our residential property”
“But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not. That is unfair.”
UK Residents typically pay capital gains tax at 28% on any profit from selling property that is not considered their primary residence.
Reuters reported in Dec 2013…
Property lawyers and estate agents said foreign owners would be relieved the tax will not apply to historic gains before 2015. But they cautioned that the overall impact could be marginal as many foreign investors see London property as a safe and profitable place to park capital.
“Tax is not the primary driver for the majority of international buyers of residential property in London,” Knight Frank’s head of global research, Liam Bailey, said.
“It is important to note that the change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris, where equivalent taxes can approach 35-50 percent depending on the owner’s residency status.”
It was not immediately clear how the tax would be collected and how it would apply if foreign owners used a domestic company to purchase property.
When a company disposes of an asset and makes a capital gain, as the main rate of corporation tax in 2014 is 21% (20% small profits rate) there could be a future tax saving opportunity for overseas investors to transfer property to limited companies.
There are other tax implications for example ATED (Annual Tax on Enveloped Dwellings) and SDLT (Stamp Duty Land Tax) but now could be a good time to consider your options.
I spotted this case on the HMRC website the other day…
Elm Milk Ltd 2006 STC 792
A business bought a car for its managing director. It recorded a resolution that the car was for business use only. The managing director had another car that was used for private journeys.
The Court held that there was no reason why a car could not be made unavailable for private use by suitable contractual restraints, and that a company could enter into a binding employment contract with its sole director. Therefore, on the facts of the case, the car was available for business use only and input tax could be reclaimed.
The court held that HMRC had given too much weight to the physical constraints and insurance and should have focused on contractual constraints, the employment contract and board minutes.
The following case is also very interesting…
The ‘Shaw’ case
In the Shaw case the taxpayer bought two BMW X5 vehicles together, one for use in his farm business, the other for use privately. Mr Shaw also owned two other cars privately as well. HMRC [again] argued the case based on the social and domestic cover on the insurance policy, but Mr Shaw rebutted this by showing how the insurance policy for his combine harvester had ‘social, domestic and pleasure’ cover too! He added that the premiums for both the X5s and the harvester were lower as a result.
If there is No Private Use then there is no benefit in kind and no fuel scale charges.
So what should you do to prove there is no private use:
- Keep the car on the company’s business premises
- Keep the keys at the company’s business premises
- Prepare a Board Minute
- Makesure your contract of employment bans private use
- Keep a mileage log
- Insure the car principally for business use
Unlike Pool Cars you don’t have to prove it was available to other employees