24 Jan 23

Do you own one or more rental flats with cladding issues?

Have your flats with cladding issues become impossible to raise mortgages against since the Grenfell Disaster case?

If so, finally we may have some good news for you, especially if you have mortgages against these properties and you are a higher-rate tax payer.

The first piece of good news is that if the value of the properties have in fallen since you purchased them you can now transfer them into a Limited Company without paying Capital Gains Tax “CGT”, whether or not you might otherwise qualify for ‘incorporation relief’.

Why might you want to transfer your rental properties into a Limited Company?

You can no longer offset your finance costs against your rental income if you own properties personally, but you can if they are owned within a Limited Company structure. Furthermore, you can freeze the value of your company shares and have all future growth accrue to shares held outside your estate. The benefit of this is that any future increases in the value of the properties, including when the cladding issues are resolved, will not form part of your estate for inheritance tax calculation purposes.

But what about repaying the mortgage?

The reality is that you do not need to. HMRC manual 65745 says…

“The transferor is not required to transfer business liabilities to the company but often does so. This is normally done in practice by the company giving the transferor an indemnity in respect of those liabilities.”

Your Company might need to pay Stamp Duty Land Tax “SDLT”, but in some circumstances, there are tax breaks available to mitigate that too. Specifically, when the properties are owned by two or more persons engaged in a property rental ‘business’ and you transfer the whole of that business as a going concern into a Limited Company. In this regard, HMRC manual PIM1020 answers the question for us “Who carries on a rental business?” as follows …

“Any person or body of persons carries on a rental business if:

  • they own or have an interest in land or property in the UK; and
  • they enter into transactions that produce rents or other receipts liable to Income Tax or Corporation Tax from that land or property.”

Our strategic partners at Cotswold Barristers can deal with all aspects of the sale and purchase process described above, as well as forming a SmartCo structure for inheritance tax planning purposes, but the starting point should always be an assessment of commerciality and viability.

Link to original article

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