Paul Merrell: Residential property – to incorporate or not to incorporate?

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It is less than six months until the restriction of tax relief for finance costs on residential property lets takes effect.

The restriction is being phased in so that by 2020 interest will not be allowed as a deduction against rental income, but instead there will be a 20% deduction from the tax liability.

Landlords have continued to lobby the government for changes to the measures and, most recently, a campaign group was unsuccessful in an application for a Judicial Review at the High Court.

It is not expected that the legislation will be amended and the following are some examples of situations where the changes could have a major impact:

  • Interest charges are significant compared to rental income
  • Increase in taxable income drags an individual into higher rate tax
  • Rental income is partly covered by the personal allowance
  • Substantial repair or other costs incurred in a period
  • Accumulated rental losses to date
  • Increase in taxable income results in withdrawal of child benefit
  • Increase in taxable income results in withdrawal of personal allowances

Tailored advice should be sought for individual circumstances but it may be appropriate to transfer the property business to a company. As with any decision regarding incorporation of a venture it depends on the facts of the case and weighing up the potential savings with potential additional costs.

As well as ongoing tax implications, tax charges can arise on the transfer of a property portfolio. Reliefs are available to eliminate or reduce the tax charges if certain criteria are met but these are not straightforward and you should seek detailed advice if you are considering incorporation.

It will also be necessary to discuss any change of ownership of the properties with lenders at an early stage to determine whether borrowing can be transferred and what additional costs there may be.

There is no one-size-fits-all solution and it is only by discussing your objectives that it is possible to determine the appropriate ownership structure.