Investment properties owned jointly are taxed accordingly, rental profits and capital gains are split between each tax payer. Furthermore, the whole or part ownership of such properties can be transferred between spouses (married or civil partnership couples) and the transfer will be exempt from capital gains and inheritance tax. This creates tax planning opportunities so that income and capital gains tax allowances and rate bands for each individual can be applied to the total income and gains from a portfolio of properties to minimise combined tax liabilities.
However, a complication often overlooked when considering this area is stamp duty and this has become more prevalent since the introduction of the 3% surcharge for second properties in April 2016. As a reminder an additional 3% is added to the standard stamp duty rates for second property purchases at all levels and so the stamp duty nil rate band becomes a 3% band on prices from nil to £125,000 and the 2% band becomes 5% from £125,001 to £250,000 etc.
Stamp duty is charged on the price paid or consideration provided and so transfers between spouses without payment would not incur stamp duty unless a mortgage is involved. Usually a lender would require both parties owning a property to be named on the mortgage and so a transfer of any proportion would require a transfer of mortgage liability which is effectively a price paid. Stamp duty is payable on the value of the mortgage transferred.
For example, a £350,000 investment property is owned by one person as a second property with a buy-to-let mortgage of £250,000. That person’s main home is owned jointly with his or her spouse (or the spouse owns any other property for that matter) and the couple decide to transfer the investment property so that they each own 50%. The mortgage value transferred is £125,000 and stamp duty will be payable at 3% equating to £3,750. Note that prior to April 2016 this transaction would have been within the nil rate band of stamp duty.
Another common example is where two people get together each owning their own home. They keep one property as an investment and live in the other one as their main home. There is no tax problem at this stage but further down the line they decide to remortgage their main home to take advantage of a better rate of interest and they transfer the property to joint ownership so that the mortgage application is strengthened by both of their incomes. One person takes on 50% of the existing mortgage liability and so has effectively paid for their new interest in a second property. Stamp duty is payable accordingly.
Before considering a transfer of ownership it is important to compare the stamp duty cost to the economic and other benefits. For substantial mortgage liabilities within property portfolios it may be beneficial to restructure debt before transferring ownership.
Earlier this summer the Chancellor announced fundamental changes to the taxation of dividends from shares held in limited companies. These changes will become effective in the next tax year starting 6th April 2016 and will mean that many shareholders will have higher income tax bills to pay. Owner-managed companies pay dividends as a more tax efficient method than say profits from a partnership or sole trader. With the tax saving offered by dividends set to reduce under the new rules is incorporation still an attractive proposition?
There is more to running a business than saving tax. It is often said that tax shouldn’t be the reason for business decisions but instead should be taken into account when considering how to achieve your goals and objectives. You wouldn’t invest in new equipment unless you had a commercial need or use for it. However, you might select energy efficient equipment qualifying for enhanced tax allowances if that made the numbers more advantageous. On the other hand you might simply select energy efficient items for reasons of corporate social responsibility.
Limited companies will still offer strong tax planning advantages over partnerships and sole traders despite the obvious tax saving on dividends set to reduce. Aside from tax the other advantages of running your business through a limited company include:
Limited liability status – good insurance policies go a long way to protect you from the consequences of unfortunate events but what if an employee, member of the public or customer had a claim against you that wasn’t fully covered? In most cases the claim would be against the company and not the owner personally thus protecting personal assets such as the family home. Compare this to partnerships where partners are personally, jointly and severally liable for their shared business. One partner’s mistake could lead to another partner being sued.
Professional image – limited liability status may be perceived by some to indicate a more established and professional business. This can help with marketing.
On the other hand there are disadvantages to limited companies. . .
Companies are registered at Companies House where records are open to inspection by members of the public. This means that restricted details about the identity of the directors, shareholders and the company itself are in the public domain and freely available on the internet. This includes annual financial statements. Small companies are only required to file simple financial statements with far less detail.
It can take time for a new company to build up a track record and credit rating. This can make raising finance more challenging if required during the early stages. This applies to the incorporation of a long established business as well as a new start-up.
Companies and directors must comply with the Companies Act and Corporation Tax legislation. The rules affecting directors and shareholders are more complex and in particular care should be taken to observe the distinction between company and private assets and transactions. These rules also bring what is commonly referred to as additional “red tape”.
Deciding which legal form is right for your business is a personal choice. Accountants are trained in this area and good accountants will be only too happy to guide you through this process.
Too many business owners under-utilise their accountants. This means that they are missing out on the benefits that a good accountant can bring to their organisation.
As an accountant with over ten years’ experience in the profession I have observed a common theme to client relationships in general. The client brings their records in to the accountant’s office once a year for the preparation of annual accounts and tax returns, the accountant duly prepares them, they have an all too brief chat about it and the documents are signed and submitted to HMRC etc. This process is repeated every twelve months without any significant contact in-between.
Why is this bad for business?
Accountants are multi-skilled professionals. They have a skills set that covers areas which could be missing from your organisation. The absence of these skills could be a competitive disadvantage for your business.
Thinking ahead, making informed decisions and reflecting upon the outcome of those decisions are essential to surviving, growing and competing in business. Finance is a big factor in all of this because ultimately, when it comes to running a business cash is king.
You could be missing out. Tax legislation changes all the time with the introduction of new tax planning opportunities and withdrawal of old ones nearly every year. It may be possible to change your business structure to save tax or improve efficiency. Your accountant doesn’t know everything that’s going on in your business and the less you speak to them the less likely they are to come up with ideas to help you.
What can you do about it?
It doesn’t have to cost a lot.
You may not want to implement a full blown budgeting and management reporting system but just keeping in-touch with your accountant and discussing the financial impact of the decisions you make in business throughout the year will help you to keep focused and make the right decisions. It will also give your accountant a better insight into your business.
Who can help?
You need an accountant who has a long term perspective when it comes to client relationships. They are easy to spot. Taking your phone calls, making time for meetings, showing a genuine interest in your business and offering relevant ideas for improvement are all signs of a good accountant. This level of service shouldn’t have to be at a premium price because it is as good for your accountant’s business as it is for yours. Helping your business succeed should be part of the service.