Property118, a prominent online resource for landlords, has issued a significant advisory, recommending against the use of Section 162 incorporation for landlords who currently hold mortgages on their properties. This guidance marks a notable shift in approach, urging caution amidst what can be a complex area of tax planning for buy-to-let investors.
Section 162 of the Taxation of Chargeable Gains Act 1992 offers Capital Gains Tax (CGT) relief when an unincorporated business is transferred to a company, typically allowing the deferral of CGT. However, Property118's current position suggests that applying this relief to individual property portfolios, particularly those encumbered with mortgages, carries substantial risks. The core concern revolves around whether a landlord's property activities qualify as a 'business' in the eyes of HMRC, a crucial prerequisite for S162 relief. If HMRC deems the activity not to be a business, the incorporation could trigger immediate CGT liabilities on the appreciated value of the properties, alongside potential Stamp Duty Land Tax (SDLT) implications on the transfer of equity or beneficial ownership.
For many years, landlords have explored various strategies, including incorporation, to mitigate the impact of Section 24 mortgage interest relief restrictions, which limit the amount of finance costs that can be deducted from rental income. Incorporating properties into a limited company allows mortgage interest to be fully deductible against rental profits, potentially leading to lower tax bills for higher-rate taxpayers. However, the path to incorporation is fraught with complexities, including the potential for 'deemed disposal' for CGT purposes and the need to refinance properties into a company name, which can incur new mortgage fees and higher interest rates.
The advice from Property118 underscores the critical importance of obtaining specialist tax and legal advice before embarking on such a significant restructuring. The implications for first-time buyers are indirect, as any changes in landlord behaviour could impact the supply and demand within the rental market. For existing homeowners, this advice primarily affects those who also own investment properties. Landlords considering this route must carefully weigh the potential tax savings against the immediate costs and risks of triggering unforeseen tax charges, especially when properties are mortgaged, as the transfer process can be intricate and costly.
The broader context for this advice lies in the evolving tax landscape for private landlords in the UK. Since the introduction of Section 24 in 2017, many have sought compliant ways to optimise their tax position. However, HMRC's interpretation of what constitutes a 'business' for tax relief purposes remains a key determinant, and Property118's current stance suggests a cautious approach is warranted where significant mortgage debt is involved, highlighting the potential for misinterpretation and severe financial consequences if relief is denied.
Source: Property118