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Property Restructuring

Covid-19 is creating challenges for the whole country, but there will undoubtedly also be some opportunities too. This tax bite looks briefly at some of the tax-related opportunities that could exist in relation to property in the current climate.

With predictions that property prices may reduce in the short term as a result of Covid-19, now may be a good time to consider extracting expensive residential properties from what have become tax-inefficient structures. Corporate structures for owning expensive residential properties have long been favoured by non-residents, chiefly for IHT and CGT reasons, but now the tax benefit of those structures has been eroded, first by applying CGT to non-residents’ gains on residential property (from April 2015), then by extending the charge to IHT for non-doms to include indirectly held residential property (from April 2017) and most recently (from April 2019) imposing CGT for non-residents on gains on the sale of “property rich” assets such as shares in property SPV companies. The tax cost of unwinding such structures, where properties were sat on inherent gains in value, may have stopped so-called “de-enveloping”, but with the property market shutting down during lockdown and the economy facing a challenging time as the country attempts to return to normal, the resulting reduced property valuations might make re-visiting that decision worthwhile.

Conversely, property investors with leveraged residential portfolios will now be feeling the full effect of the restriction to tax relief on mortgage interest and so may be considering moving into a corporate ownership model. This measure originally had effect in the 2017/18 tax year but was tapered in to full effect over the next three years and so from April 2020 all interest costs on residential property will only receive a basic rate deduction for tax purposes. This change alone could tip a property business into a net after tax loss and so investors should consider transferring their portfolio into a company (which should get full tax relief for all interest costs, and in any event pay tax on rental profits at a lower rate - 19% compared with 40%/45% for higher and additional rate income taxpayers). Again, the tax cost (chiefly SDLT) of moving to a corporate structure is one of the key roadblocks to moving to what can be a much more tax efficient operating model. However, reducing property values in the short term could create opportunities to reduce entry costs, which may make changing operating models more palatable.

If you have clients who have been talking to you about these or similar points, or who you think would benefit from hearing about them, as always please do not hesitate to contact us.


Posted on 26/10/2020 in Property Tax News

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