If you are an individual landlord with residential properties held for rental purposes, you might be thinking about transferring your properties into a company - this is known as incorporation.
Owning a property portfolio through a limited company can offer significant benefits, such as reducing the rate of tax that is applied to rental profits and side-stepping the restriction on tax relief for mortgage interest that applies to properties held personally.
In this article we lay out the tax and other implications likely to arise for both the individual and the company by going down the incorporation route.
The key things to be aware of if transferring your property into a company are as follows:
1. Transferring the name on the title deeds will qualify as a disposal under the capital gains tax regime;
2. A valuation of the property will be required of the properties transferred so that the true gain on the disposal can be calculated (even if the property is transferred by the taxpayer at cost);
3. The disposal of the property or properties must be reported to HMRC via the Capital Gains Tax on UK property Account within 60 days of completion of the disposal with any capital gains tax due also paid by this date;
4. The disposal of the property or properties would also need to be reported in your income tax self-assessment return if you are already registered for income tax self-assessment or are required to register;
5. You have a personal capital gains allowance of £12,300 so would only have to pay income tax on any gain above this at a rate of 18% or 28% assuming depending on whether you are a basic, high rate or additional rate tax payer;
6. Instead of having your rental income (profits from rental of property) taxed at 20%, 40% or 45% under income tax, you could take dividends from the company in which the properties have been moved to and get taxed at either 8.75%, 33.75% or 39.35% depending on whether you are a basic rate, high rate or additional rate taxpayer and only on dividend income over your annual dividend allowance of £2,000. This would clearly be more tax efficient for you;
7. Your liability in terms of the rental property would go from being unlimited to limited to your equity investment;
There is a relief called incorporation relief which is designed to delay capital gains tax liabilities for individuals who are incorporating businesses, however, HMRC has argued that they do not consider properties held for renting by an individual to constitute a business. Incorporation relief is available when assets which are being incorporated constitute a business and not simply an investment. What constitutes as a business is subjective, but HMRC generally would require the taxpayer to have held multiple properties and have spent a considerable amount of time per week (20 hours per week according to the Ramsay v HMRC case) managing those properties before they were transferred to a limited company. The consideration being received by the disposer (you) would have to be in new shares in a company.
The implications for the company would include many generic responsibilities for trading (and in some cases non trading) companies:
1. Preparing and filing statutory accounts to Companies House every year;
2. Filing an annual confirmation statement with Companies House;
3. Preparing and filing a corporation tax return with HMRC and paying any tax due;
4. Being liable for stamp duty on the purchase of the properties. Stamp duty is paid on the market value at the date of transfer and applies regardless of whether cash is paid, or shares are given for the properties, or the properties are gifted to the limited company.;
5. Paying stamp duty rate on any residential property purchased above £40,000 at a rate of 3% to up to 15%. This is the case whether it's the first property purchased by the company or not.
6. Being able to claim full relief on mortgage interest on properties held. This relief was abolished under income tax and replaced by a tax credit at the basic rate of tax.
The company and the individual who is transferring the properties into the company's name will both have to incur legal fees during the process.