One of the questions we get asked most regularly at GRA is whether or not an LTC is the appropriate structure for proposed property investment activity. Before we touch on our view in relation to this, I want to confirm some basics in relation to LTCs:
- An LTC is a company that elected into the Look Through Company regime for tax purposes. In all other respects it is an ordinary company.
- From a tax perspective it is "transparent" which means that profits and losses produced by the activity undertaken by the company is deemed for tax purposes to be profit or loss of the shareholder. There are various rules, some of complexity, imbedded within the LTC legislation including loss limitation rules, prohibition on declarations of shareholder salary and consequences on moving shares and exiting the LTC regime.
- There are restrictions on what companies can qualify for election into the LTC regime, which shortly stated include limits on the number of shareholders and restrictions on who the shareholders can be (i.e. only natural persons, trusts or other LTCs can be shareholders in an LTC).
It is not unusual for us at GRA to hear about other advisors warning their clients against using LTCs often the arguments go something like this:
- If you own the property personally you get to utilise the tax losses in just the same manner as if you owned it via an LTC.
- Owning the property personally is simpler and you avoid the compliance and complexity of an LTC.
- Following this, don't bother setting up an LTC when holding the property personally will produce largely the same results without LTC complexity.
While there is some accuracy to the above statements it is not a view shared by GRA and we think that practitioners are doing their clients a disservice if they immediately write off the use of an LTC.
Our view is that an LTC is often the right structure. This is because we see LTCs as having advantages over personal ownership such as the following:
- Although an LTC is transparent for income tax purposes it is a separate legal entity so that it does provide a layer of limited liability protection. This may be less pressing in the context of residential property investment, but still a point worth noting.
- Often investors like to hold loss making assets personally so as to take advantage of tax losses, but do not envisage this necessarily being a long term structure. If you own property personally you then have legal costs to convey titles if you then want to restructure ownership into a trust for example. On the other hand with an LTC you can move the shares without incurring the same legal costs.
- It is true that movement of shares can trigger depreciation recovery in the same way that movement of property from personal ownership can, but there are exemptions from depreciation recovery in the context of LTCs that are not available with personal ownership.
- LTCs offer better planning for asset protection. With an LTC being a separate legal entity you develop a shareholder loan when you inject money into the LTC. This is something that can be moved into trust protection.
- There is more flexibility for tax planning in terms of effective debt structures and potentially remuneration to working spouses. These are things that do not necessarily exist in personal ownership.
In summary, the LTC is far from useless. In GRA's view they are a potentially effective ownership structure and it is short sighted to dismiss them merely because they contain some complex rules. If you would like to talk to me further about setting up an LTC or any other financial matter just give us a call to arrange an appointment. Or why not download our free eBook report "Look Through Company (LTC) Explained".