Incorporation: Building tax efficiency?
There are many options as to how property can be held. The most straightforward form of ownership is generally direct personal ownership. However, with interest relief restrictions around the corner and lower rates of corporation tax in 2017 (plus a further fall in 2019), incorporation is firmly on many planning agendas as something to consider. Here are a few thoughts on the subject.
What are the advantages?
A company is not subject to the new interest relief restrictions that, once fully phased in, will cap tax relief on this expense at basic rate. This is not an issue for those who only pay basic rate tax or have no funding to service but will impact upon higher and additional rate tax payers along with highly leveraged portfolios. It may even send some into an annual loss making position. Incorporation for those situations could well be the answer.
A key disadvantage of incorporation is often considered to be the double layer of tax when property is sold and the profit subsequently extracted. With the rate of corporation tax falling to 17% in a few years, anyone who is looking for an income ‘roll up’ option in the medium to long term will see a significant difference in annual taxation between this and the highest rate of personal taxation – 45%. Overall the lower taxation environment within a company can allow for a higher post tax retention to use for reinvestment in enhancement, repairs or portfolio additions as well as capital repayments of debt.
When property is sold within a company, indexation relief is available to set off against the profit made as a result of capital growth over time. This is not available to individuals. If property has been held for a long period of time this can be a very valuable relief to reduce the capital gain subject to corporation tax.
Succession planning is often easier using a corporate vehicle, as shares can provide flexibility particularly where property is held as an investment (generally let property) and Capital Gains Tax (CGT) relief on gifts of business assets is unavailable. A bit of careful structuring can go a long way to mean tax effective intra-family transfers stack up.
In the absence of a specific tax relief, the transfer of property to a company causes a cessation of trade and is a disposal for CGT purposes. An abundance of tax charges could be heading your way. However, if a business exists, it is possible in the right circumstances to meet the conditions for incorporation relief to reduce the financial pain.
What is our advice?
Always to consider your business objectives from a commercial perspective and then spend time with an adviser considering the tax angles and how these can dovetail into the ideal solution for you. There are some key advantages to incorporation and that makes considering the option well worth the time.
If you would like to discuss any of the aspects covered in this article, please do not hesitate to get in touch.
Date: 17th June, 2016
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