Tax Set-up

Question from Terry updated on 11th November 2011:

I need some advice on how we are to be structuring a small portfolio of 1960's built residential investment properties. They are currently all positive cashflow and need to understand the best way to go about re-structuring to keep the tax man happy aswell as us to benefit the most obviously. They are still setup in an LAQC however not sure if we should be sliding into an LTC or if there is any gain / benefit. We wil be at some point selling and buying a new family home in the horizon - however this is not under an LAQC as it is under my own name. Any suggestions will be much appreciated Thanks

Our expert Mark Withers responded:

Your immediate issue is to determine which elective option you are going to adopt for your LAQC. Options include:

  • Default to QC status 
  • Transition to Look through company 
  • Revert to standard closed company 
  • Transition to partnership.

For most, the decision tree starts by determining if you are profitable in the absence of depreciation. It sounds like you are. If you become a LTC and are profitable the profits are taxed at your personal marginal tax rates, probably 33%.

If losses do eventualte these can also be flowed to shareholders and are not ring fenced. If you remain a QC losses are ring fenced but where profitable you have the freedom to retain your profits in the company and benefit from the new 28% corporate tax rate which may well be lower than your personal rate.

Either way, depreciation will probably still need to be recovered when you sell down. Reverting to a standard closed company is probably not ideal as distributing the capital gains on sale as dividends can result in these dividends being taxed in the hands of the shareholders. The QC status and LTC status avoids this. Reverting to partnership is a possibility but legal and banking fees tend to take the gloss off this option when you have a few properties in the portfolio and I still see some value in the companies limited liability status.

Remember also that the company tax rate at 28% is now a full 5% lower than a trusts. All food for thought! 

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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