Incorporation myths

There are many myths surrounding incorporation of a property portfolio, mostly generated from social media.

1) It is high risk and likely to be shut down by HMRC

Statistics published by one consultancy show that they have incorporated over 1500 property portfolios since 2016.  There have been 24 HMRC Compliance Checks.  All these enquiries closed down in correspondence without further tax being due.

There was an HMRC research group tasked with investigating Family Investment Companies (FICs).  However in August 2021 the group was disbanded.  The unit reported that its work had come to an end, concluding that:

“there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours”.

Following the disbandment of the group, HMRC view FICs as part of ‘business as usual,’ which is very welcome news for families.

2) It can cost you a fortune in CGT and SDLT

If your assests are owned by a family partnership there is no CGT or SDLT to pay when transferring your property business to a company.  There are extra statutory concessions deliberate designed to assist small businesses to professionalise and limit their liabilities within corporate structures.

3) It takes at least three years to incorporate a portfolio

Depending on your circumstances, this could take as short a time as six weeks.  For example, if you are a married couple and you own the properties jointly you already have a partnership which makes the process of incorporating much easier.

4) Mortgage lenders do not allow this to occur

This practise may contradict the terms and conditions of some buy-to-let mortgage lenders.  With others, there is no breach of terms.  The mortgage remains intact with the individual who took out the loan.  The company provides an indemnity for the individual liability.  The property title remains in the individual’s name until such times are you are ready to transfer the legal title to the Family Investment company.

5) You need to prove that you work 20 hours a week on your portfolio

In order to consider that your activities are a business and not a collection of investments then you, your agents and representatives will need to demonstrate that an average of 20 hours a week is worked on managing the business.  This extends to lettings agents, plumbers etc.

A limited liability partnership does not have to make this case as it is a business by definition.

6) It is very expensive

The costs for advising and managing this process vary widely between different advisors.

However, the IHT tax savings alone from a Family Investment Company structure are likely to run into millions for modest portfolio owners.

The annual tax savings on net rental income post incorporation can range from 25% to 100% of the fees, therefore in some cases the savings are seen in the first year following incorporation.

7) If you were planning to sell properties then it isnt worth it as you will pay corporation tax on the capital gain

If you sell at the value of the property at the point of incorporation, there is no gain tax triggered whatsoever. The company “purchased” and sold the property at the same value. The prior gain is washed into the share value which may or may not trigger a tax charge in the future.

8 ) Limited companies will be subject to restrictions on allowability of finance costs in the future so it is not worth it

This has been stated by amateur observers since Section 24 was initially announced. It has not happened. If it were to happen it would be particularly complex to apply in legislation.  There were reasons why it was restricted to income tax when it was introduced.

Our article on “Substancial incorporation structure explained” provides more information –

If you have any questions on incorporation reach out to me.

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