The death of the LAQC: what now?
For many property investors, the 2010 Budget was the bitter icing on top of what has been an average cake for the last few years. The global financial crisis has dulled lenders’ appetite for low equity, high debt arrangements; property values are 5.5% below the market peak of late 2007 according to the latest Quotable Value data; and Inland Revenue is placing the property sector under increased scrutiny.
As for the Budget, not only will it remove the ability to claim a tax deduction for depreciation on buildings from 1 April 2011, but it also placed the beloved loss attributing qualifying companies (LAQC) under threat.
That threat is now taking shape in the form of a draft legislation, making it timely to consider the implications for you and any LAQC structure that you may have in place.
The Government will effectively abolish the LAQC rules for the income year starting on or after 1 April 2011. If no action is taken, LAQCs will simply become qualifying companies (QCs) by default. QCs have the same characteristics as LAQCs but without the ability to attribute losses to shareholders.
But don’t hit that panic button just yet; a new vehicle called a ‘look through company’ (LTC) is being introduced. A LTC will be treated like a partnership for tax purposes, with all income, expenses, tax credits, gains and losses allocated to shareholders (subject to certain loss limitation provisions). A LTC will provide the benefits of a corporate structure in terms of limited liability but with the tax characteristics of direct ownership (similar to the current LAQC treatment.
A transitional period will allow shareholders of an existing LAQC to move to a new structure without incurring any tax costs. This provides a one-off opportunity to alter your current structure without tax cost, and in some situations it can result in permanent tax savings.
Shareholders of a LAQC will be able to choose to:
• Continue to be a QC (without loss attribution)
• Become:
- an LTC
- a partnership
- a limited partnership
- an ordinary company
- a sole trader (if the LAQC only has one shareholder)
Once the transitional period has expired, any change in the ownership structure may cause an unfavourable tax position, by triggering depreciation recovery, for example, or forfeiting accumulated losses.
Your situation will determine which structure will provide you with the best tax position. Factors that will require your consideration include:
• Will your property operate at a tax loss once depreciation has been removed?
• Will you be subject to the loss limitation provisions?
• What do you intend to do with the property?
• How much equity do you hold in the property?
• Do you plan to buy additional properties?
• Will compliance costs exceed any benefits?
One thing is for certain; doing noting will result in unexpected consequences. If you would like to discuss what these changes will mean for you we are happy to explore the options most appropriate for your circumstances.