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Incorporation: Investors must be cautious

In response to recent calls for landlords and property investors to incorporate, one letting agency is urging people to take a cautious approach.

Benham & Reeves Residential Lettings says that the benefit of incorporation could depend on the landlord's circumstances and that it may not make financial sense.

The idea of incorporation – registering a property portfolio as a limited company – has come about as a result of tax changes which will affect those who personally own investment property.

The formal wear and tear allowance has been abolished and from next April top rate tax payers will see the amount of relief they can claim on their buy-to-let mortgage reduced from 45% to the basic rate of income tax, which is currently 20%.

Accountancy firms and tax specialists have long been urging landlords to incorporate as companies which invest in residential property are unaffected by the tax changes and pay a fixed rate of tax on their profit.

Benham & Reeves Residential Lettings says that landlords who chose to take this route will effectively have to 'sell' their portfolio to their new company, thereby incurring additional stamp duty charges.

The savings made on mortgage relief are unlikely to be enough to mitigate the new 5-12% stamp duty rate for quite some time, says the agency.

It says there is also a possibility of triggering capital gains tax (CGT) if incorporation relief cannot be claimed.

The London firm says it has run a series of calculations and determined that for most investors – even high rate tax payers – it still pays to buy the property in one’s own name rather than through a company.

“Although the monthly rental profit may be higher for the company as it does not pay the higher rates of tax, ultimately the private landlord comes out ahead financially once dividends or CGT on liquidation following the sale of the property are taken into account,” it says.

“To realise the company’s assets, the company either has to issue a dividend or will have to be liquidated which will trigger CGT on the distribution that has already been subject to corporation tax.”

The firm's finance director, Vidhur Mehra, comments: “Although some professional advisors are advocating incorporation, we have run the figures and in many circumstances, private landlords come out ahead financially.”

“That said, each investor is different, each portfolio is different and there are different timescales for investment with some looking at the medium term and others seeking to hold onto their portfolio indefinitely.”

He says that incorporation might not suit all and that there are hidden costs associated with incorporation and so investors must take these into account before taking such a 'drastic step'.

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