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Markel Tax

15 May 2020

What is keeping property tax consultants busy?

We were expecting a consequence of the lockdown to be a dramatic reduction in the number of queries relating to residential property transactions. The expectation was that whilst construction activities may continue, the volume of sales and purchases would significantly reduce.

Whilst the volume of sales and purchases has gone down, despite the lockdown we have noticed an increase in queries relating to residential property, and in particular buy-to-let portfolios.
Many owners of buy-to-let portfolios have been considering incorporation due to the changes to the treatment of finance costs. This is the first tax year that the full impact of the change to restrict the tax deduction for residential property finance costs to the basic rate of tax will be felt – the change having been progressively introduced over the previous three tax years. Time at home is bringing this into focus for landlords.

The key considerations when considering incorporation of a buy-to-let portfolio are whether there is a business—so that incorporation relief for CGT can apply—and whether the business is being carried on in partnership — so that the SDLT partnership provisions can apply. Without the CGT relief and the SDLT partnership provisions there is the risk of significant tax charges arising, in particular SDLT which could be up to 15% of the market value of the property.

There is unfortunately no statutory definition of business and the statutory definition of partnership is somewhat circular with references back to the business being undertaken. References to a “UK property business” for income tax purposes should not be taken to confirm that a business is being undertaken for the purposes of claiming incorporation relief.

A body of case law has built up around the meanings of business and partnership. Areas that can cause difficulty when assessing a buy to let portfolio against the case law relating to a business include the following:

  • Multiple other sources of income, including full time employment

  • Ownership of multiple businesses or companies

  • Use of a managing agent, including one connected to the property owner

  • Insufficient scale of the property rental activity

When considering whether the business is then undertaken in partnership, factors taken into account include the sharing of losses, costs & liabilities and the way the partners & partnership are presented to suppliers and customers, including name or names used and clarity that partners are representing the partnership.

In our experience many cases have a disjointed fact pattern which has developed over time, and where different factors may point to different conclusions. Each case needs to be reviewed based on its own facts.
Assuming that the tax costs of incorporation are manageable then operating through a company can also lead to other benefits. These include lower rates of corporation tax for profits which are reinvested in the property rental activity rather than drawn by the owners, and the ability to transfer ownership to future generations via the transfer or issue of shares as part of wider succession plans.

Working with our private client colleagues we are considering the wider succession piece, as the ability to transfer ownership of the property portfolio via shares is leading into discussions around Family Investment Companies. Some clients are considering moving away from solely investing in bricks and mortar, whilst others are looking to provide a solid capital base for future generations to exploit, starting with the existing property portfolio but perhaps moving into trading activities in future. The ability to combine all these activities through a family controlled investment vehicle can have attractive tax consequences as well as commercial ones.

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Tagged Property tax & SDLT Tax for entrepreneurs and corporates COVID-19
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