Section 24 question? – BTW Osborne I’m not going to give up and sell!

Lots of people around trying to sell the incorporation route, which is rarely viable for existing properties owned but worth considering for newly acquired properties. It makes good fees for advisers, but with the new dividend tax rates it is an absurd strategy.
It is true, if you had property loss carry forwards, as many had from the 2008 era, these get swallowed up by future profits which are inflated by the disallowance of mortgage interest.
However these unrelieved finance costs can be carried forward until there are enough rental profits. This is happening rapidly, especially due to the 100% disallowance of mortgage interest.
One caution before rushing into a corporate structure, the overall tax structure is changing in from 6-4-22. Dividends, because of the so-called NI hike will get their own NI hike and move up to 8.75%, 33.75% and 39.35% tax rate. This is after paying 19% corporation tax. Capital gains tax on company property disposal distributed via dividend at the top marginal rate would be 19% plus 39.35% which nets out at 50.87% whereas residential CGT for an individual is 28% but with a £12,300 exemption.
You might be able to get Business Assets Disposal Relief at 10% rather than the high rates of dividend tax but you would need to liquidate the lot in the same period.
I have BSc, FCA, CTA(fellow), ATT in case you, unlike me, think I'm Mr Know-all.

Hi Steve

Thanks for sharing your thoughts.

As a professional property investor myself, I know that incorporation is the only viable long term strategy, which is why so many professional and savvy investors have already incorporated and so many more are incorporating. They are not stupid people; they are very clever successful people who have comprehensively analysed the alternative solutions with the support of their professional advisors and arrived at the same conclusion as I did.

You say it's rarely viable for existing properties, but I must respectfully disagree. There are so many reasons I could give you why this statement does not hold true, but I will keep it brief and just mention two points that would otherwise cause the majority of property investors who have invested for retirement income a whole world of pain - capital gains tax and inheritance tax.

You also mention 'double taxation' of corporate dividends, but this is not quite as it may seem to many. If you perform identical calculations for income tax liability as an individual owner of property versus a corporate owner, as dividends are taxed at a lower rate than income and dividend tax only applies to a smaller figure after corporation tax, the difference is not so great. However, the HUGE difference comes when you consider finance costs; if they cannot be relieved directly, then the individual landlord's effective rate of tax can exceed 100% of their real profit. This is simply never the case with corporate taxation. Also, a corporate landlord can choose the level of dividend income that they take and retain the balance of profits in the company, meaning that profits can be reinvested net of only corporation tax, which is a far more efficient way to grow a portfolio than paying up to 100% 'George Osborne' income tax and then trying to reinvest the rest.

PS. In relation to Business Asset Disposal Relief, HMRC is very clear that this cannot apply unless the company's 'property investment' activities are small compared to the company's 'trading' activities, which is highly unlikely to apply to property investors >> https://www.gov.uk/business-asset-disposal-relief#:~:text=the%20company%E2%80%99s%20main%20activities%20are%20in%20trading%20(rather%20than%20non%2Dtrading%20activities%20like%20investment)

Reply to the comment left by Alex at 05/02/2022 - 12:31
Excellent input Alex. Shares in the corporation can also be distributed to your spouse or other family members who can receive dividends too.

I have operated an investment company for 12 years and besides purchasing our own properties, undertake acquisition work for two private family funds. Properties are held in SPV structures to minimise taxation with one of the SPV's now valued at around £65M. Follow the money!

Reply to the comment left by Simon at 05/02/2022 - 12:52
I completely agree Simon. That’s why Alex Caravello is the Director of training and CPD for Property118 Tax Consultants.

In response to the elements the comment left by Steve Watt implying that we are “selling incorporation”, nothing could be further from the truth. We are advocating bespoke professional advice as opposed to a “one-size-fits-all” approach.

Points taken and of course for those that have chosen to be highly leveraged, corporate is the way to go.
However there are many nuances.
For many small landlords a limited company could be a useful vehicle without it owning properties. The limited company could charge the landlord for managing his properties and the landlord charges a small fee for carrying out the management work (in his quality as a self-employed person rather than in his quality as a director). This helps to aleviate HMRC's resistance to accepting hands-on landlords as qualifying as self-employed persons. It is especially difficult for HMRC to unravel if the landlord is not a shareholder or director. This enables the landlord to pay Class 2 NI (£158.60/yr) and achieve a qualifying year for state pension.
If the landlord is past retirement age he can charge his service company any level of fees and have no NI class 4 9% bill and no corporation tax or dividend tax. If the level of fees is deemed expensive then there is a valid argument for claiming that one is not the cheapest property manager.
Alternatively the limited company could pay into a SIPP (up to £40,000) which would be a transfer of the company's profits before any tax gets levied.

Reply to the comment left by steve watt at 05/02/2022 - 13:27
Hi Steve

What makes you think landlords can’t pay Class 2 NIC’s and qualify for pension regardless of their status? The HMRC manual linked below is very clear in this point.

https://www.gov.uk/renting-out-a-property/paying-tax

I must also disagree with your point suggesting that only highly leveraged landlords can benefit from incorporation. Below is a link to a case study of a landlord with no mortgages whatsoever who benefitted massively from incorporation.

https://www.property118.com/benefits-incorporating-rental-property-business-no-mortgages/

This is from the HMRC NIC manual
https://www.gov.uk/hmrc-internal-manuals/national-insurance-manual/nim23800
I have an enquiry right now on this subject. They would like landlords to pay voluntary NI which is five times the price and gives the same coverage.

Reply to the comment left by steve watt at 05/02/2022 - 14:05
If you decide you need any professional legal help you know where to find us.

Pointing them to the manual I linked to above might well negate that requirement though.

Good luck 🤞

Regarding the incorporation article for an un-mortgaged landlord it can be valid for a sizeable portfolio but it requires a partnership to exist or be created. Also the need to be trading rather than investing which may be challenged by HMRC long after he has paid your fee.
I hope you would admit that you probably get quite a volume of enquiries from landlords with 3-5 properties, but for whom it is not going to be viable.
Some of the tax saving is because the asset is now locked up in a company and there is a latent tax liability to extract the equity.
Also in the example, he will be paying 25% corporation tax instead of 19% as his profits will be way over £250k. This must change the viability.

Reply to the comment left by Mark Alexander at 05/02/2022 - 14:14
from HMRC's manual:
A person who is liable to Income Tax on the profits arising from the receipt of property rental income will only be a self-employed earner for NICs purposes if the level of activities carried out amounts to running a business.
The nature of property letting requires some activity to maintain the investment, but that is not enough to make it a business. For example, being a landlord normally involves:

undertaking or arranging for external and internal repairs
preparing the property between lets
advertising for tenants and arranging tenancy agreements
generally maintaining common areas in multi-occupancy properties; or
collecting rents.

In order for a property owner to be a self-employed earner, their property management activities must extend beyond those generally associated with being a landlord