Stamp Duty Holiday – Should You Take The Opportunity To Incorporate?

Image of Stamp Duty Holiday

September 21, 2020

Shall I incorporate my property portfolio?

This is the buzz question that a lot of property owners and entrepreneurs are asking. It is no doubt the 3% holiday on Stamp Duty till the 31st March 2021 is very attractive. However, is it enough to incorporate your existing portfolio?

Let us be straight here, I’d love to give you a definitive answer to this question and make everyone’s life easier. This is simply not possible as there are too many variables that determine the cost to incorporate. This equation becomes more complicated by the future intention of you the owner.

Despite this, the simplified illustrated walkthrough helps you to ask the right questions to ask yourself when taking on this task so that you know where to begin and what to be considering.

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Image of Stamp duty Diagram 2

Let us take you through a worked example

Mr H is a higher rate taxpayer and has inherited a property worth £200,000 4 years ago. On review, he isn’t entitled to incorporation relief which would save him paying Capital Gains Tax and he doesn’t have a mortgage.

He has diligently submitted his tax return and pays his income tax each year. He wants to expand his portfolio to create wealth for his future but the 40% income tax is causing him to doubt whether it is worth it. His accountant has mentioned he could incorporate a company but offered little support on the viability of such a move.

In this vein Mr H seeks independent advice with the following information.

The property is now worth £240,000 and achieves a rental yield of 6% per annum with 15% of other tax-deductible expenses.

Mr H’s current position:

Rental Income£14,400
Expenses£2,160
Profit£12,240
Income Tax£4,896

Over 5 Years Total Income Tax = £24,480

At the market value, the property is worth £240,000 and it will materialise a gain of £40,000 if he incorporates. The capital gains on this transaction would be £7,756 and the stamp duty would be £7,200. He appreciates that this Stamp Duty is discounted by 3%.

If he were to incorporate, the Limited Company would have a base cost of £247,200.

Mr H’s “new” tax position would be:

Rental Income£14,400
Expenses£2,160
Profit£12,240
Corporation Tax£2,325

Over 5 Years Total Corporation Tax = £11,628

Mr H is happy that the 19% Corporation Tax is a lot more favourable and feels more comfortable in buying up more residential property.

It’s 21% cheaper in headline tax terms and it will take just under six years to cover the cost of the capital gain tax and stamp duty.

Mortgage rates are not as competitive for Companies compared to personal ownership

Accounting fees for Company Accounts are higher

Now Mr H can make an informed decision with the financial information and marry it with his future intentions for his property and future portfolio.

His advisor points out a few other points:

  • He would be able to pass on the shares rather than the property to future generations if he wanted.
  • The base cost in the company would higher and therefore won’t incur double taxation on the gain already crystalised
  • In conclusion, there is no substitute for doing your numbers and making a conscious effort to really define your intentions for the future.
  • Your opportunity to take advantage of the reduced stamp duty is to move now as it will take some time to complete the move from a personal to a corporate structure.

We do also understand that not everyone can work out their capital gains tax and their stamp duty position and portfolio’s may be more complicated than Mr H’s.

This is where we offer an expert hand and put the question to incorporate or not incorporate to bed once and for all.

It may be that your best strategy is to do nothing, but you will be kicking yourself later if you realise that you missed out on the stamp duty holiday.

Using Gower Accountancy to complete the “personal property to corporate structure” journey doesn’t mean you have to switch accountants, it’s an independent review to allow you to make a clear and informed decision.

Feel free to connect with me in any of the following ways:-

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