Do you own a Property Portfolio? Then this blog is for you
Landlords, take note! From 2020, changes to Mortgage Interest Relief are due to kick in. They could result in a double hit. Firstly, landlords will only be able to obtain relief at the basic rate of 20%. They'll see a large increase in their taxable profits and a corresponding drop in ‘real’ profits. In other words, they’ll be paying more tax. Secondly, matters may be made even worse by the removal of wear and tear allowances.
Not such a gloomy outlook
If you’ve been following recent blogs, you’ll recall our fictitious family, the Savers. Let me re-introduce you to Jean and Dave Saver. They’re in their late 50s and have built up a handy property portfolio. The plan is to earn regular rental income through their retirement, before passing the portfolio on to their children, Emily and Joe.
The question that’s bothering Jean and Dave relates to the new legislation (outlined above) that comes into effect in April of next year. Can the impact of the increased liability be softened? And the answer? Potentially - yes! Here’s how -
Jean and Dave need to incorporate their property portfolio. In other words transfer it into a limited company - one that they’ve set up specifically for this purpose. This approach can yield several potential benefits.
- Jean and Dave will still receive the full benefit of Mortgage Interest Relief
- They’ll retain profits in the company, thus avoiding unnecessary income tax
- Provided they meet certain criteria, their Capital Gains Tax liability can be ‘held over’.
What about Stamp Duty (SDLT)? Will that still be payable?
Again - the news is potentially good. Because Jean and Dave own the properties as a partnership, then they may be able to avoid paying SDLT on the transfer of the property.
How about Capital Gains Tax (CGT)?
Again - potentially, CGT won’t be payable.
There are circumstances under which Jean and Dave might benefit from ‘holdover relief’. In these cases, no CGT has to be paid on the transfer of the portfolio to the company. It only becomes due on the sale of the company shares.
So how do Jean and Dave obtain this Holdover Relief?
They need to satisfy certain criteria, based on proving that the portfolio is being run as a ‘business’ -
- How much time do Jean and Dave devote to working on the properties?
- Do they have any hands-on involvement in their maintenance or management?
- How large is the portfolio?
It’s clear that incorporating their portfolio may well help Jean and Dave to legitimately avoid being penalised by the new legislation. However, there a number of ‘ifs’ and ‘buts’. What should the next step be for Jean and Dave? How do they decide whether or not to incorporate their portfolio?
As you might expect, the one thing they should do is … seek advice. They should contact us. We’ll find out all they need to know. We’ll produce an advisory report that will account for their circumstances and confirm whether their portfolio, as it stands today, will attract SDLT or CGT. We can then advise Jean and Dave about the incorporation process.
Here to help
And of course, you can do the same. Property Portfolios might seem complex, but we can make them simple. Do you want to protect yourself against unnecessary SDLT or Capital Gains Tax?
Call 01234 713021 or drop me an email. I’d welcome the chance to help.