The government has not been quiet in targeting landlords and the rental sector. The changes to mortgage interest restrictions for individuals has significantly reduced investors’ profit margins and some are considering new ways to structure their portfolios.

Rumour has it that the spring Budget will see a rise in taxes across the board to fund the government’s Covid-19 support, with many expecting to see increases in Capital Gains Tax (CGT).

If rumours are to be believed, the rates could increase in line with income tax. Landlords whose profits have been squeezed in recent years will undoubtedly be unimpressed if a large chunk of the disposal proceeds are now to be relinquished.

Once a portfolio is held in a corporate wrapper, it can currently benefit from a full deduction for its mortgage interest costs. Companies are subject to lower corporation tax rates on profits and eventual disposal, plus they benefit from limited liability giving landlords another layer of protection.

The main consideration before a transfer takes places is whether it will trigger a significant tax charge from SDLT and CGT. Ordinarily, SDLT and CGT will be chargeable at the market value at the date of transfer between the connected parties, therefore obtaining valuations as evidence will be key.

For some, full relief from SDLT and CGT may be available provided certain conditions are met, but this is an extremely complex area and should be reviewed on a case-by-case basis as it is not a blanket exemption.

Residential portfolios can benefit from the temporary SDLT holiday rates which are in place until 31 March 2021. The holiday reduces the SDLT rate to 0% for the first £500,000 of the purchase price, but does not take into account the 3% surcharge applicable to companies purchasing residential property.

The holiday rates can be combined with multiple dwellings relief (MDR), which can further reduce a potential liability by up to £15,000 per additional property. MDR is a relief which enables a purchaser to apply SDLT to the mean value of the purchased dwellings (i.e. splitting consideration equally over the total number of dwellings purchased in the same transaction) as opposed to paying the SDLT on the actual value associated to each one.

Portfolios with residential and commercial properties can also benefit from reduced SDLT liabilities as HMRC issued a change of opinion in November 2020. This change provides an opportunity to avoid the 3% surcharge if MDR is applied to the residential element. CGT is chargeable on the uplift in value from the original purchase price. If the transfer is liable to trigger a CGT liability, incorporating the portfolio now is advisable as it is highly possible the CGT rate will rise in the future. 

An often-overlooked tax is the Annual Tax on Enveloped Dwellings (ATED), an annual reporting requirement for companies holding a residential property over the reporting threshold, currently £500,000.

A company will have 30 days to report the properties to HMRC and claim any reliefs from the charges. Annual returns in advance are required by the 30 April and the penalties for non-compliance can be substantial, even if no tax is due.

Company structures provides flexibility for family or succession planning matters. The company can initially be set up with other shareholders or its shares can be transferred in the future. If shares are transferred CGT will be chargeable but SDLT is not triggered as it does not relate to the transfer of land. Instead, the shares are subject to stamp duty, the current rate is 0.5%, as opposed to the much higher SDLT rates.

A company does come with more red tape and compliance costs as it will have annual reporting requirements such as financial statements to be submitted to Companies House, Confirmation Statements and Corporation Tax returns.

If a transfer is going to take place now is the time to do it. SDLT is at its lowest and tax rates are on the rise for the foreseeable future as a result of the pandemic.

*Natasha Heron is a Tax Manager specialising in property taxes at accountants Hillier Hopkins