The Government’s recent white paper on “Fixing our broken housing market” emphasised the importance of a fair and affordable rental market. However, the multitude of new taxation measures introduced over the past few years is going to make it increasingly difficult for private landlords to retain their properties. Despite this, the rental market remains strong with demand and rents expected to increase throughout 2019 so for those landlords committed to the market perhaps now is the time to undertake some renovations on their own structures to make sure they’re still fit for purpose.
So what’s changed?
- 2013 saw the introduction of the Annual Tax on Enveloped Dwellings (ATED) and a punitive stamp duty land tax (SDLT) rate of 15% for companies acquiring residential properties for personal use.
- 2015 saw the introduction of the 3% SDLT surcharge on second properties and the extension of capital gains tax (CGT) to non-UK residents holding UK residential properties.
- 2016 then saw a multitude of new legislation impacting landlords including the abolition of wear and tear allowance, the holding of CGT rates for residential property at 28% (vs. 20% for most other assets) and the introduction of the new tiered SDLT regime.
- 2017 saw the introduction of the finance cost restrictions and an extension to inheritance tax (IHT) for offshore entities owning UK residential properties.
And what’s still to come!?
- In April this year there is going to be an even wider extension to CGT (capturing all UK real estate);
- A proposed 1% SDLT surcharge on non-residents buying UK residential property; and
- A proposed ban on the tax deductibility of letting agency fees.
Is your current structure still fit for purpose?
In the context of all of these changes it seems sensible to review existing property holding structures.
Directly held property portfolios
We are frequently asked about the benefits of transferring properties from direct ownership to a company with a view to achieve the following benefits:
- Reduced rates of tax on rental profits (anticipated corporation tax rates of 17% from April 2020 vs up to 45% income tax);
- Much more generous provisions on the deductibility of finance costs (deminimus relief on up to £2m of net interest costs plus the opportunity to qualify for further reliefs if necessary);
- Historical gains may be removed (so for any future property disposals, corporation tax is only payable on future increases in property prices);
- Profits qualify for pension contributions;
- More flexibility for IHT planning.
However, the ability to transfer a property portfolio to a company without triggering any upfront tax costs typically relies on two key tests:
- The existence of a partnership (which can include joint ownership in certain circumstances) to mitigate any SDLT costs; and
- The existence of a “business” to holdover any capital gains on the disposal of the properties to the company.
We have seen some advisers attempt to skirt around these issues by suggesting various types of hybrid structures (e.g. using a corporate member of a partnership or only transferring beneficial interests in the properties to the company) but in most circumstances these will not be suitable (either because of specific anti-avoidance rules that target mixed partnership structures or restrictions in mortgage agreements preventing beneficial transfers).
Where the corporate route is not an option it may instead be worth considering establishing a partnership (which can still offer some IHT benefits).
Existing corporate structures
- It is not uncommon for privately held property businesses to evolve quite haphazardly, undertaking some development, investment, management, agency as well as other non-property related activities.
- Such structures are typically very inefficient from an IHT and CGT perspective. One option that might therefore be worth considering is the separation of the trading activities (such as the property development, agency or dealing activities) in order for the value of these activities to qualify for Entrepreneurs’ Relief (a reduced rate of CGT) and a full exemption from IHT.
- Depending on how any restructuring is undertaken, one outcome could be an uplift of the base cost on the investment properties, removing any historical increases in value from tax.
- Varying share rights or introducing different share classes can also offer further opportunities to manage IHT.
If you would like to discuss your existing property structure, please contact Adrian Smale (e) email@example.com (t) 0203 988 2031
This paper is intended to be a brief note for clients and other interested parties. The information is believed to be correct at the date of publication but should not be relied upon as a substitute for professional advice. Please speak to a member of our team.