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Landlords – To incorporate or not to incorporate?

Given the increased tax burden, it is understandable that landlords are seeking alternative structures to reduce the taxes payable to the Treasury on their rental profits.

While the cost-of-living crisis is expected to ease slightly this year, many of us will continue to feel the impact of inflation until such time as real wages catch up with consumer prices. This, if commentators are to be believed, won’t equalise until 2027. It is unsurprising, therefore, that we would consider all options available to save both money and tax.

Individual landlords are one such group that will be feeling the impact of this crisis more than most. Historically, landlords were eligible for full tax relief on their mortgage interest payments when calculating rental profits. However, following a change in the law, this was tapered away between 2017 and 2020. Essentially, landlords are now only eligible for a 20% tax credit (based on their mortgage interest costs) against their taxable rental profits.

The Promise

Given the increased tax burden, it is understandable that landlords are seeking alternative structures to reduce the taxes payable to the Treasury on their rental profits. As such, organisations have sprung up promising landlords that by implementing a unique structure, it will unlock a host of tax advantages including Inheritance Tax (IHT) and Capital Gains Tax (CGT) reliefs. Not only that, the architects of these structures also claim that they can be implemented with little or no tax leakage i.e., no Stamp Duty Land Tax (SDLT) or CGT on establishment. The final claim is that the structure works commercially, in such a way that the landlord will not be in breach of any mortgage covenants with the lender and therefore not required to notify the bank.

All that glitters isn’t gold!

With so many promises being made by the companies promoting these types of structures, and there being no commercial impact, it is no wonder that the unwary landlord would be tempted. What’s not to like? Little or no tax to pay on implementation, future tax breaks being available on a potential future exit, full tax relief for mortgage interest costs and, finally a promise that if there are unexpected taxes arising in the future, the company’s insurance policy would cover these.

The reality of these structures is that they fail on many fronts. In order to achieve the desired outcome that these companies purport, various conditions must be carefully reviewed and met by the landlord(s) at the outset. The application of tax law is case-specific and is most definitely not a one size fits all. The companies suggest that all landlords can adopt this structure and it will be a panacea to all their tax woes. However, the reality is far from this.

It is likely that there will be considerable SDLT and CGT payable by the taxpayer on implementation. The IHT and CGT reliefs they are claiming are available won’t be and, adding insult to injury, the landlord will probably be in default of his or her mortgage arrangements.

A Lesson Learned

As the saying goes: “If it is too good to be true it probably is.” Once the structure has been implemented it almost always can’t be undone without triggering further tax consequences. Reputable tax advisers will consider your medium-to-long-term objectives before advising on and proposing a structure that is viable both commercially as well as from a taxation perspective. If the driver for this is to solely save tax, with corporate interest rates potentially being higher than individual mortgage rates on buy-to-let properties, the increase could eliminate the tax savings that such structures claim to deliver. A further question to consider would be: If the mortgage broker won’t care, why don’t we just inform them of our intentions and request their rubber stamp on the proposal?

With these structures impacting numerous landlords, HMRC have established a helpline to help those that have succumbed to the promoters of this scheme. If you are considering the options available to you in respect of your property rental business, our advice would be to speak to your accountants and tax advisers to ensure that any steps you are proposing won’t be to your detriment.

Would you like to know more?

If you have any questions about the above and how it applies to your business, please get in touch with your usual Blick Rothenberg contact or Anil Arora using the form below.

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Anil Arora
Anil Arora
Director
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