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Construction, Land and Property

Property business incorporations – revisited in 2023


After nearly 15 years of (by historical reference) very low Bank of England base rates in the UK, suddenly the past 12 months has seen it increase from below 1% p.a. to over 4% p.a.

Coupled with the withdrawal of higher and additional rate income tax relief since 6 April 2020 (that was year 4 out of 4 of the phasing in of the change), the business models of landlords with even a relatively low ratio of borrowings (as compared to the value of the properties themselves) are being hit hard.

So is now the right time to revisit conversations from a few years ago regarding a possible incorporation of your property letting business?

On the face of it, the corporate tax regime is not moving very favourably either.

The main rate of Corporation Tax has just been reconfirmed as due to increase to 25% from 1 April 2023 (albeit this is only for businesses with taxable profits of at least £250k p.a., and if profits are less than this then a blended rate of between 19% and 25% will apply).

The rate of tax on dividends, which is the way most company owners opt to extract the vast majority of their drawings, have also increased by 1.25% across all tax brackets since 6 April 2022.

However, one of the biggest tax benefits to a corporate structure (which still remains) is being able to decide how much taxable income you wish to extract from a company.

In other words, where the business is making profits that are far in excess of what the owners actually need or want to extract from the business, then even with a 25% main corporation tax rate, the benefit of paying only that rate rather than a 40-45% rate on that undrawn profit in an unincorporated structure can be very significant, and obviously recur year after year.

A barrier to incorporating has often been the potential one-off tax costs - Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

However, for the past decade or so, the Ramsay case has supported CGT incorporation relief potentially applying to defer the capital gains arising in such a scenario. As ever, each case must be judged on its own merits, and there is more to prove than simply showing a business exists. There is the way the debt is assigned to the limited company, and ensuring that only shares are issued as consideration, to name just one point we still need to watch out for.

Where the existing business is a partnership, or at least in joint ownership which may then be able to convert to a partnership as an intervening step, invariably the partnership relieving provisions can reduce the chargeable consideration for SDLT purposes down to £nil, particularly for partnerships between close family.

There are, of course, both tax and commercial downsides that need to be considered and weighed against the possible tax benefits. Some of our clients have incorporated not because of mitigating tax on the profits they make, but so that they can access the share structure flexibility that a company can offer, and begin their estate planning early.

The point of this article is to say that despite the increased rates of Corporation Tax and Dividend Taxation, some businesses will still be appropriate for conversion to a limited structure, and in fact there probably isn’t a single scenario which would have been appropriate under the previous tax rates that suddenly wouldn’t be suitable because of the rate change.

Perhaps the biggest challenge though, won’t be taxation. Many landlords will be locked into good mortgage rates for a little while longer, and incorporating before these come to an end will accelerate the bad news of higher finance costs and possibly incur some redemption fees as well. So reviewing the scenario is important, but the timing of restructuring is equally so.

As always specialist advice should be taken because every case is different and certain advantages/disadvantages will be more relevant to some than others.

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