One of London’s major letting agencies is urging landlords to take a cautious approach to whether they should incorporate in a bid to reduce their tax liability following George Osborne’s recent fiscal changes hitting the private rental sector.
“For existing landlords, it may not make financial sense to incorporate their existing portfolio. In effect, these landlords would have to “sell” their portfolio to their new company, thereby incurring stamp duty land taxes in doing so” explains Vidhur Mehra, finance director at Benham & Reeves Residential Lettings.
Mehra says the savings made on mortgage relief are unlikely to be enough to mitigate the five to 12 per cent SDLT for quite some time. There are certain circumstances in which the SDLT would not be payable but for most landlords the tax would be compulsory. There is also a possibility of triggering a capital gains tax if incorporation relief cannot be claimed.
However, Mehra says the bigger question is whether new property investors or existing landlords seeking to add to their portfolio should do so through a company.
BRRL says that for most investors – even high rate tax payers – it still pays to buy the property in one’s own name rather than through a company.
Although the monthly rental profit may be higher for the company as it does not pay the higher rates of tax, ultimately the private landlord comes out ahead financially once dividends or CGT on liquidation following the sale of the property are taken into account.
To realise the company’s assets, the company either has to issue a dividend or will have to be liquidated which will trigger CGT on the distribution that has already been subject to corporation tax. What’s more, mortgages are more difficult for companies to obtain and are subject to commercial rates, thereby eroding the mortgage relief gains.