Richard Verge’s blog of 25 January asked the question should I incorporate my buy-to-let business?
It was aimed at UK persons who were looking to mitigate the impact of a future restriction of the tax relief for interest payments on their buy-to-let mortgages and the impact of the 3% SDLT increase for second properties.
Capital Gains Tax
Incorporation comes at the cost of an SDLT charge on transfer of the property into a company and the Capital Gains Tax payable on the transfer. As the company is connected with the seller the CGT is payable on the full market value of the property irrespective of the price recorded in the documentation.
Residential property
When CGT rates were reduced to 10% or 20% on 6 April 2016 the reduction did not apply to gains on disposal of residential properties. The impact is that individuals who incorporate will pay Capital Gains Tax at rates of either 18% or 28% on the gain they make on that property. This “dry charge” is a disincentive for incorporation. However this CGT rate could be reduced to 10% or 20% by investment in Enterprise Investment Scheme (EIS) shares.
Enterprise Investment Scheme
Capital gains on sale of property can be deferred if the vendor invests in EIS qualifying shares. The reinvested gain would be deferred for the period that the shares are held. When the EIS shares are sold the deferred gain becomes taxable at the rate of CGT applying at the time of the share sale. The CGT which is payable is no longer classified as a disposal of residential property but a deferred gain and therefore charged at 10%/20%. Due to a technicality this opportunity only applies to investment in EIS qualifying shares and does not apply to Seed Enterprise Investment Scheme qualifying shares.
As well as CGT reliefs, a qualifying investment in EIS shares which are held for a minimum period of (generally) three years results in a 30% income tax relief for the subscriber.
In summary, one of the concerns about incorporating a buy-to-let business is the Capital Gains Tax which is payable. With the cash resources and the appropriate appetite for risk this concern can be partially alleviated by use of EIS investments.
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.
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