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Personal tax  •  Tax Planning  •  Tax Relief  •  Taxation

Unravelling the tax complications involved in incorporating property into a limited company

By RJP LLP on 21 January, 2020

When facing their 31 January tax liabilities, many landlords will be wondering about the most tax efficient way to own rental property. The loan interest relief restrictions which came into force on 6 April 2017 have gradually increased landlords’ income tax liabilities and these will be higher than ever this January. As a result, interest tax relief erosion has made owning residential property within a company appear attractive, particularly where a property portfolio is highly geared.

Limited company ownership of residential property

Many landlords have considered incorporating their properties and decided against the exercise, because it will have other complications. This can include capital gains tax and stamp duty on the transfer of property, and often the fact that the rental income will then be within a company and they will face additional tax liabilities in order to extract it. In addition, it becomes necessary to change the borrowings from the individual to the company, which often involves practical difficulties in addition to increases in interest rates.

In the right circumstances however, using a limited company for property investments can work from a tax perspective, but it is not advisable for all situations. It is also a simpler option for new property investments rather than entering into the more complex strategy for converting existing rental investments. In short, the amounts involved need to be worth the effort!

Incorporating existing rental property businesses

On a transfer of property into a limited company where the parties to the transfer are connected, capital gains tax is payable based on market value unless relief is available to hold the gain over. This relief is available if the transfer of property is deemed to be the transfer of a business as a going concern. This means that it must be something more than the transfer of assets; it must be an active and operating business. This means there must be a number of properties within the business and regular activities must be carried on in the running of that business. The courts have found that working on a property business for around 20 hours per week constitutes regular activities, and HMRC have not, do date, argued with this finding.

In summary, if your rental business falls within the necessary criteria, the capital gains arising on transfer can be held over.

In order to utilise this relief, certain criteria need to be met in addition to the above; namely all of the assets of the business, excluding cash, must be transferred and the consideration payable by the company must be the issue of shares in that company.

Stamp Duty Land Tax - SDLT

Where it is possible to hold over the capital gains arising, SDLT may nevertheless be payable based on the market value of the properties being transferred.

Where however the properties are held in a partnership business, it may be possible to claim relief from SDLT. There are however anti-avoidance provisions to consider; these apply if a taxpayer creates a brand new partnership prior to incorporation, just to avoid the SDLT charge. This relief therefore tends to be open to existing partnerships only.

Beware of incomplete advice about partnership incorporations

There are strategies being offered to landlords to transfer their existing rental properties into limited companies for tax saving purposes whilst not changing the ownership of the property at Land Registry. This avoids difficulties in transferring borrowings from individuals to a limited company and the probable hike in interest rates. This of course means the lender is not aware of the transfer and there are significant questions over how ethical, or even legal, this strategy is.

If you are a residential landlord and would like advice on managing tax liabilities across a property portfolio and the most tax efficient way to own rental property, please contact us by emailing partners@rjp.co.uk.

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.