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September 19th 2017 / BY: Wisteria

Should I Incorporate My Rental Business?

With changes to the taxation of landlords, more and more people are wondering whether they should be setting up a company for their rental business. Much of the interest in this idea has been sparked by the press and stories online.

Unfortunately, there are a number of myths popping up as a result. Suggestions such as ‘I can set up a company which will earn the rents in full, but without transferring the property’. This type of planning is not possible within current laws without triggering other tax consequences.

There are also a number of companies selling planning schemes for landlords which claim to circumvent the new rules, or at least achieve a better tax result and which involve the use of LLPs. These schemes tend to be costly to implement (£30k+ in professional fees), and no matter what might be promised, are far from proven. There is nearly always an inherent risk of a HMRC challenge. They are not, as some people may claim, HMRC approved. Very few things are!

Incorporating a company and transferring properties to that company may be good planning depending on the circumstances. In most cases there are likely to be income tax, capital gains tax and stamp duty implications. More often than not, this means a tax cost up front in order to achieve long term savings.

Factors that may affect whether this is worthwhile include:

  1. The number of properties and their current value
  2. Whether these properties are currently sitting at a gain
  3. Whether there are existing mortgages in place and whether they will still be needed under a corporate structure
  4. How much the owners of the properties are reliant on the income that is generated. Do they need it to live on?
  5. What the current owners marginal tax rates are
  6. To what extend the company may be used as an inheritance for the next generation
  7. Whether the owners have the funds to pay any initial tax cost.

As a result, it is not possible to provide a ‘one size fits all’ answer to this question. Clearly setting up a company may achieve some tax savings net of fees. However each case needs to be assessed individually. What is clear is that individuals with a single small property, those reliant on all of the rents to live off or properties currently sitting at very large gains, are unlikely to significantly benefit from setting up a property ownership company.

Perhaps the predictable answer is that you will need to take professional advice .

For more information on Wisteria’s specialist property tax services, please contact us.