Landlords: beware when incorporation sounds too good to be true

09 May 2017

In a recent article we reported that owning property in a corporate structure is not for everyone, with the tax implications needing careful consideration. We now look at the incorporation of a property business and why those generous tax reliefs that a landlord could be tempted by may not be all they seem for everyone.

A company structure can be very appealing, with a current corporation tax rates of 19 per cent, set to reduce to 17 per cent in 2020, and the availability to claim tax relief for mortgage interest paid without restriction. If all of this could be achieved without any CGT or stamp taxes implications it is easy to see why it would be the perfect tax planning option for all landlords. But what should a landlord be aware of to determine if these reliefs apply to them?

Incorporation relief for CGT purposes is only available on the incorporation of a property business allowing those who operate a property ‘business’ to transfer property to a company without any CGT charge.

But what determines whether you have a property business? This will depend on a number of factors, such as the number of properties, the time dedicated to running the portfolio of properties, how this portfolio is managed, etc. Such arguments may well come under scrutiny by HMRC as demonstrated in the case of Elizabeth Moyne Ramsay v HMRC which was heard by the Upper Tribunal before agreement was reached that a property business did exist in that particular case.

Each case will depend on the facts and landlords and their advisers should consider carefully the level of activity in their existing ‘business’ before assuming incorporation relief is available. In most cases where properties are held and managed as an investment asset incorporation relief will not be available.

Even if incorporation relief is available, an SDLT or LBTT charge would still arise on incorporation although, for those who operate their unincorporated property business in partnership (and that may include a partnership with their spouse or civil partner), the transfer of the property could be exempted from SDLT or LBTT.

Whether a partnership business exists, compared to joint ownership, will also depend on specific facts and HMRC would certainly not look favourably on structures created solely to achieve a tax advantage.

With a wealth of information on the internet promoting such tax relief landlords should beware and seek advice relating to their own specific circumstances. Unfortunately in tax, if something sounds too good to be true, it usually is.

For more information please get in touch with Joan Foster, or your usual RSM contact.