Since the recent announcement of various changes to the taxation of unincorporated property businesses, there has been renewed interest in incorporation: would it be possible to shelter property income and capital gains inside the lower Corporation Tax regime?

 Unfortunately, this apparent quick-fix for property business owners is fraught with dangers for the unwary. For example:

• Stamp Duty Land Tax (SDLT): a transfer of an investment property by an individual to a limited company is normally a chargeable transfer for SDLT purposes if the previous owner and the company are considered to be connected for tax purposes. SDLT would be payable based on the market value of the properties transferred. In certain circumstances, the transfer of property from a partnership to a limited company can be made free of SDLT considerations.
• Capital Gains Tax (CGT): since the Ramsay case, HMRC now accept that property investment can be considered a business, as long as the involvement of the owners represents more than just a “modest” quantity of activity. If, therefore, an existing unincorporated property business meets this more than modest criteria, the potential CGT liability when property is transferred into a limited company can be rolled over into the base cost of the shares issued on transfer. If not, landlords may face a significant CGT bill when they transfer property to a company.

There is also the end game to consider, what will happen when landlords want to retire and sell off their properties. If they have incorporated successfully, the cash that remains after property disposals and Corporation Tax has been paid, will presumably be required by the shareholders. If they subsequently withdraw this cash pool from the company, they will incur additional Income Tax, if not CGT charges. Taken together, these Corporation Tax and extraction tax costs could possibly exceed the tax costs of a similar, but unincorporated, property business.

The message is clear, tread carefully. Each unincorporated property business should consider the short and long term tax costs of incorporation before proceeding. Landlords should take professional advice before acting…

From 6 April 2016, savers will no longer pay income tax on interest they receive from certain deposit accounts. This is due in large part to the introduction of the Personal Savings Allowance (PSA) on the same date. The PSA is worth £1,000 to basic rate taxpayers and £500 to higher rate taxpayers. So, if you are a basic rate taxpayer, and your bank interest is below £1,000, you will pay no tax on the interest you received. If you are a higher rate taxpayer, you will pay no income tax on interest received as long as it does not exceed £500.

Prior to 6 April 2016, deposit takers, in the main banks and building societies, were required by law to deduct tax at 20% from any interest they paid to depositors. As a significant number of depositors receive interest under the PSA limits, this tax credit is to be scrapped and all interest payment will be made without deduction of tax.

 Here’s HMRC’s notes to the draft clause that will enact the PSA in the Finance Bill 2016:

“Deposit – takers (such as banks) and building societies, currently deduct 20% from the account interest they pay, under the Tax Deduction Scheme for Interest (TDSI). Similarly, National Savings and Investments (NS&I) currently deduct sums representing income tax at the basic rate from the interest it pays on certain bonds. For these purposes, returns on certain alternative finance arrangements are treated in the same way as interest.

At Budget 2015, the government announced the introduction of a new Personal Savings Allowance (PSA) from 6 April 2016. Once the PSA is implemented, most individual savers will no longer be liable for tax on any of the savings interest they receive. The government therefore also announced that, alongside the introduction of the PSA, it would end the duty on banks, building societies and other institutions (including NS&I) to deduct sums representing income tax from account interest paid or credited to customers.”