Landlords are considering moving their rental property into a Ltd Company for a number of reasons:
- Companies pay tax at more favourable rates then individuals at just 19%
- Limited Companies are unaffected by the BTL mortgage restriction rule
- Inheritance tax planning is more straightforward
However, if a Landlord was to transfer an existing portfolio into a Limited Company it can result in significant tax bill
- Can trigger a Capital Gains Tax charge on each property being transferred
- Can trigger a Stamp Duty Land Tax charge on each property being transferred
Are you running a property business?
HMRC can classify someone as running a property business if:
- being a Landlord is your main job
- you rent out more than one property
- you are buying more properties to rent out
If you are running a property business then you may be able to claim incorporation relief on the transfer of properties to a Ltd Company. This will mean no capital gains tax will be due.
However, you may still be liable for Stamp Duty on the transfer.
Are you running a Property Partnership?
Landlords may jointly own properties which are let out as part of a partnership business when:
- There is a significant amount of business activity involved
- The partnership is organised similar to that required in a commercial business
- The investment business is operated with a view to making profits
Incorporation of a Property Partnership
If you are running a property partnership you may be able to claim incorporation relief on the transfer of properties into a Limited Company meaning no capital gains tax will be due. You may also be able to claim relief from Stamp Duty provided
- The Partners are connected (family members)
- The ownership of the newly formed Company is in the same proportion as that seen in the original Partnership
A Recent Tax Case
In a recent tax case (E Moyne Ramsay v HMRC) it was accepted that incorporation relief could be claimed where a “property business” transfers rental property to a Company in exchange for shares.
This means that the Capital Gains Tax on transfer of properties from a Property Partnership to a Limited Company can be deferred until the shares in the Company are disposed of.
The Tax Benefits
As mentioned earlier, Limited Companies are still able to claim mortgage interest as an expense in the accounts without it being restricted.
Rental profits generated in the Company will be subject to corporation tax (19%) at a much better rate then that for an individual who is a higher rate tax payer (40%).
In addition to this, as the properties are introduced into the Company at market value this will form the new base cost for Capital Gains Tax purposes.
Therefore, when the properties are sold the Company will only pay capital gains tax (19%) on the difference between the sale price and market value when the properties were first introduced to the Company.
What about capital gains tax when I dispose of my shares?
It is correct that there will be a further capital gains tax charge when you dispose of your shares.
However, in future years the Company could change the nature of its business to that classed as a trade by HMRC.
For example, if the Company was to dispose of its investment properties, it could then concentrate on generating other forms of income through Property Management or by carrying out Property Developments.
Provided the Company engages in what HMRC classes as “a trade” for at least a 24 month period, the shareholder would be able to make use of “entrepreneurs relief” on disposal of their shares.
Entrepreneurs relief allows the shareholder to pay capital gains tax at just 10% on sale or closure of the business.
This provides a significant tax advantage to investors.
If you require some specific tax advice on whether your current property business constitutes a “Property Partnership”, or if you would like to discuss the benefits of running your business as a “Property Company” please feel free to contact us for a free, no obligation initial meeting.