Incorporating portfolio of property may leave complex tax affairs to be managed
The head of Which? Money takes on the minefield of property and taxation
QI have inherited a house and want to rent it out to a family member. Do I have to charge market rent or can it be a reduced rate to what they can actually afford? And should I put the property into a limited company or keep it in just my name? Finally, I do have another buy- to- let property in my own and my wife’s name ( we do currently complete tax returns each year), which we’ve held for 16 years. Would I incur capital gains tax if I transferred this house into a limited company along with the inherited house?
AI’ll preface my answer by saying that if you are thinking of incorporating your portfolio of properties, you should seek professional tax advice. It is a complicated process and, while you’re used to completing a tax return, could leave you with significantly more complex tax affairs to manage.
Why is placing property in a limited company an attractive idea? It mainly comes down to tax. If you set up a company, which becomes the legal owner of the property, you no longer pay income tax on your rental profits ( 19 per cent, 20 per cent, 21 per cent 41 per cent or 46 per cent in Scotland). Instead, you pay corporation tax on your profits, which is currently charged at 19 per cent If you’re a higher earner and in the 40 per cent tax brackets, this could cut your tax bill in half.
However, you need to weigh up the costs you would incur by incorporating, which could be significant.
When you transfer the property into a company, it is effectively purchasing it from you. This means you will have to pay stamp duty with an additional 3 per cent surcharge for buy- tolet properties. You may also have to pay ‘ Annual Tax on Enveloped Dwellings’, which will vary depending on the value of your overall portfolio. If it’s more than £ 500,000 but less than £ 1m, it’s £ 3,700 per year. If it’s above £ 1m, but less than £ 2m, it’s £ 7,500 per year. Despite the tax advantages of incorporation, this could take a serious bite out of your profits. But the biggest potential hit for you could be capital gains tax. Capital gains tax is payable on any property you own that isn’t your main residence, regardless of whether you are selling it or transferring it to a property. If you have held this property for 16 years, it’s likely that you’ve made a significant profit – the average property price has risen from £ 150,000 in 2004 to £ 239,000 today, according to the Office for National Statistics, 59 per cent in total. And you would have to pay either 18 per cent or 28 per cent ( depending whether you’re a basic- rate or higher- rate/ additional- rate taxpayer, respectively) on all of that profit. Tax advice is essential if you want to seriously consider incorporating – there’s lots I don’t know about your current portfolio. But my instinct tells me it’s not going to be worth the costs for only two properties.
Just a final point on rent – you’re entitled to decide the rate at which you charge rent. The only complexity would be if you were the executor of the estate, as well as the heir, and if charging a lower rental was in all of the heirs’ interests.
Gareth Shaw is Head of Money at Which?