How does a capital gains tax work?
Broadly, when an individual/limited company/chargeable person disposes off a capital/chargeable asset at a profit, a capital gain arises. Individuals currently pay CGT at 10% / 20% based on the level of their other income. Sale of UK residential property attract higher CGT rates of 18% and/or 28%. Limited companies do not pay capital gains tax rates but instead pays corporation tax on its gain.
Commonly, an individual would sell an asset to realise a gain however a gift can sometimes also constitute a disposal for capital gains tax purposes. It is therefore important to take advice (in writing) that your desired transaction will not trigger a capital gains tax charge on yourself. Provisions are available in the legislation for the loss of the asset to be treated as a capital disposal for CGT purposes however each event would need to be looked into in isolation to apply such rules.
A technical point to note here is that death is not chargeable point for capital gains tax purposes.
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Is incorporation right for you?
You will have heard about the benefits of incorporation from lots of sources – YouTube, property clubs, mates at the pub etc and the internet is full of people selling its advantages. But is it right for you, in your particular circumstances?
It is true that if you incorporate your property rental business you will get around the problems of s. 24 restrictions on finance costs. But it is worth looking at the costs of incorporation, as well as the costs of taking profits out of the company, before deciding it is worth it for you.
Firstly, there will be both capital gains tax and stamp duty land tax (SDLT) on the transfer of your property business to the company. You can achieve some SDLT savings by claiming that the lower non-residential rates apply or multiple dwellings relief but the 3% additional surcharge on transfers to corporates will always apply.
You will pay capital gains tax on the increase in value of the property since you acquired it, and the amount of the mortgage will make no difference. There are also the additional costs of refinancing through a corporation, which will also tend to face higher interest rates than a personal mortgage.
Profits in the company would be taxed at the corporation tax rate (currently 19%) which means that the net profit in the company is higher than holding personally. However, paying a dividend or salary from the company will be taxed at your income tax rates. This is effectively double taxation.
Once you factor in the running costs, then you can see that the price of saving the finance cost restrictions can be high compared to the savings achieved.
What can you do about it? Or rather, what can we do about it?
Firstly, we can advise whether incorporation relief applies to reduce the capital gain costs of the transaction. We can look at SDLT reliefs that can reduce the costs. We can also see if creating a partnership to run the business is a good option, either as a medium-term plan or an alternative to incorporation.
Which planning is best for you depends on all sorts of factors – are you looking to expand your portfolio or just hold your existing properties? Do you want to involve your children in the business? Are you a higher or basic-rate taxpayer? Is inheritance tax planning important to you?
We will look at all of these issues before telling you what we think is the best option. That may be incorporation, or it might be some other structure.
Call now for an initial free fact-finding consultation and see how we can help you.
How Can We Help?
We can work out the CGT payable (if any) by you based on the facts and events. If you are planning on carrying out a transaction which would trigger CGT, it is imperative that you seek advice prior to the deal. We can assist you in reducing your CGT liability (where possible) and set up a structure for your business and personal assets.
Contact us today for an initial consultation session.