Ever since the dreadful ‘Clause 24’ restrictions were first announced, many landlords have looked to a company as a means to mitigate the damage wrought by an unfriendly Government. Last November, the Chancellor dealt another blow by announcing a freeze on indexation relief for companies. Here, Carl Bayley, author of several plain English tax guides, including ‘How to Save Property Tax’ and ‘Using a Property Company to Save Tax’, takes a look at the consequences.
Before last November’s Budget, using a company to hold your property investments had never looked more attractive. The only restrictions on interest relief in a company apply when the company is part of an international group and pays more than £2m in interest annually. Apart from that, a company enjoys full relief for its interest and finance costs. Alternatively, the investor can borrow personally to invest in their own property company and still enjoy full relief at their top rate of Income Tax for the interest on their borrowings.
Companies also benefit from a Corporation Tax (‘CT’) rate of just 19% (17% from 2020). The benefits are reduced where profits are extracted (typically as dividends) but as long as a reasonable amount is retained and reinvested in the company, the investor can enjoy significantly greater after tax returns.
None of this has changed since last year’s Autumn Budget, so the tremendous benefits of operating a portfolio within a company still remain. What has changed as a consequence of the Budget is the impact of selling the properties within your company. Let’s look at what this means in practice.
The Freeze
Indexation relief for companies has been frozen as of December 2017. This means that for sales taking place from January 2018 onwards, relief will still be given for the period from date of purchase to December 2017, but there is no relief in respect of further inflationary increases thereafter. From January 2018 onwards, the company is exposed to tax on the growth in the cash value of its properties, regardless of how much of that growth is simply down to inflation.
