Transferring a property to a limited company

We have many landlord clients or clients that inherit or purchase a second property to rent out and one of the questions we are regularly asked is about transferring property into a limited company.

Tax benefits can be achieved when transferring property into a limited company because you will pay corporation tax rather than income tax on rental income from the property. There are also other potential benefits including being able to claim allowable expenses, tax relief on mortgage interest, and limited legal liability.

In this blog we look at the advantages and disadvantages of transferring a property to a limited company.

Transferring a personal property into a company

You should consider transferring a property or multiple properties into limited company ownership even if you hold one property or you hold a personal property portfolio of numerous buy-to-let properties. Undertaking a transfer can provide tax advantages if done correctly and with professional advice from qualified tax advisors such as dns accountants.

Because limited companies are separate legal entities to the individuals that own and run them, they are subject to a different set of tax rates and reliefs. The tax rates for companies can often be lower than personal tax rates.

Because a limited company provides limited liability it can also protect you from risk.

However, if you are considering transferring personal properties into a limited company without seeking professional advice, you could fall into a many ’tax traps’ that may end in substantial tax charges if it is not undertaken correctly.

Tax considerations when transferring property to a limited company

We recommend you seek professional tax advice from a qualified tax advisor when undertaking the transfer of property to a company because there are numerous taxes to consider, these are:

• Corporation Tax
• Stamp Duty Land Tax (SDLT)
• Income Tax
• Inheritance Tax (IHT)
• Capital Gains Tax (CGT)

Below we will consider each of these taxes in more detail.

What are the advantages of transferring a property to a limited company?

Corporation tax and income tax

Because a limited company pays corporation tax on property income and the corporation tax rate can be lower than paying income tax (depending on your profits vs your personal income) there can be tax savings when moving property into a limited company.

The rates for corporation tax depend on the level of profits but they currently range from 19% - 25%. Wheras, personal income tax rates are currently:

• 20% for basic rate taxpayers.
• 40% for higher rate taxpayers.
• 45% for additional rate taxpayers.

Often directors of a limited company can save personal tax by undertaking tax-efficient ways to pay yourself from the limited company in comparison to the personal tax you pay as a sole trader when properties are owned directly by an individual.

For example, as a limited company owner you can take a combination of salary and dividends, with dividends attracting a lower rate of tax than salary alone. You could also add your spouse as a non-executive director or shareholder to your limited company to gain additional tax benefits and savings on income tax by using their tax-free allowance, lower tax thresholds and by them drawing dividends from the limited company.

If you retain cash reserves in your limited company, these could be later reinvested into additional properties. Additional rental income from these properties could be paid out as dividends to you and your spouse or used to contribute to director pensions.

Seek advice from a qualified tax advisor about tax efficient profit extraction to ensure you minimise your tax bill when you transfer property and take income from a limited company.

Find out more about how much tax on rental income is in our landlords guide here.

Allowable expenses

When owning a property in a limited company you can deduct allowable expenses from rental income. This will reduce the amount of profit and the amount of corporation tax you pay. Find out more about allowable expenses against rental income here.

Mortgage interest

One big change and advantage of owning property in a limited company is around mortgage interest.

Landlords that personally own and rent out properties can no longer directly deduct any mortgage interest from their rental income to reduce their tax bill. Instead, this is done by giving the individual a 20% tax reducer. Because of this change higher rate and additional rate taxpayers miss out on further tax reductions. However, when owning and renting property as a limited company, the mortgage interest is fully deductible, meaning tax is saved.

This remains one of the big incentives to people when considering whether to transfer property into a limited company.

BE AWARE: Before transferring a house into a limited company, you must check with your mortgage lender first. Some mortgage lenders don’t allow you to move the property into a limited company whilst retaining an existing mortgage. So, any properties you own personally with a mortgage still outstanding, you will need to speak to your mortgage lenders first before any transfer takes place.

Capital Gains Tax (CGT) & Incorporation Relief

Savings in Capital Gains Tax could be made when you transfer property into a limited company.

When making the transfer, you can receive shares in that company in exchange for the properties being transferred. Capital Gains Tax isn’t triggered at the point of transfer because the new shares in the company have a reduced base cost for tax purposes, equivalent to the original cost of the properties. However, you may still trigger CGT on the future disposal of those shares based on their value at time of disposal.

Incorporation relief is available to what HMRC deem to be a ’property business’ and not to those who just own property investments. HMRC generally accepts that a property business exists where a person works 20 hours a week or more on the properties. To justify the time spent on the property business, you need to have a sufficient number of properties in your portfolio.

To obtain incorporation relief, the whole property business must be incorporated as a going concern. This relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.

To qualify for incorporation relief, you must:

• be a sole trader or in a business partnership
• transfer the business and all its assets (except cash) in return for shares in the company

The company acquires the properties at their current market value. When the company disposes of the properties, it would be taxed on the growth in the value of the property since the transfer (not the growth prior to the company).

Inheritance tax (IHT)

Following a transfer of property to a limited company, your estate will own the shares in the limited company (and no longer the properties themselves). The value of those shares should reflect the value of the properties owned in the company.

By using tailored types of shares, some IHT protection could be provided on the future growth in the value of the properties. The ways to do this may be via a Family Investment Company or loans and director’s loan accounts, to reduce IHT exposure.

However, please seek professional tax advice before taking any action as IHT can be a complex area.

Limited liability

As a sole trader owning properties personally you will be personally liable for any debt, losses or legal disputes. You will also be personally liable for business loans, and this may impact your own individual credit rating.

Setting up a limited company provides legal separation between individuals and the business. A limited company limits your personal liability as the company is responsible for any debts, financial losses or legal disputes. Business finances and personal finances remain separate in a limited company and business assets will be held within the company. Within a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.

This is another advantage when transferring property into a limited company.

What are the disadvantages of transferring property to a limited company?

As with all our advice at dns accountants, we make you aware that there can be disadvantages of transferring property into a limited company structure also. We assess every case individually as the advantages and disadvantages of owning property in a limited company, can be dependent on the number of properties you own, your own personal circumstances and future plans.

However, here are some of the general disadvantages that may occur when transferring property into a limited company.

How will Stamp Duty Land Tax be calculated if I transfer my property to my limited company?

You may face an initial financial outlay on the point of transfer because you may have to pay Stamp Duty Land Tax (SDLT) based on the open market value of the property at the time of transfer. This will depend on the value of the property or properties being transferred. Additionally, the company may have to pay the 3% surcharge applicable to residential properties.

However, if you are transferring your current residence to a limited company before purchasing a new home, the transaction will not be subject to the 3% higher rate applicable to the purchase of second residential properties. If the current home is transferred to a limited company within 3 years of purchasing the new home, the 3% surcharge paid on the new property can be claimed back from HMRC.

You will no longer own the properties

When you transfer the property into a limited company, the properties will no longer be owned by you as an individual. Instead, you will own shares in the company. This can give rise to complications with mortgages, mortgage interest and mortgage lenders (see below).

Mortgage costs

Transferring property to a company can mean issues with your mortgage lender as you can’t personally mortgage an asset you don’t own. Many mortgage companies won’t agree to transfer their existing mortgage over to a limited company. You may therefore find that your ongoing costs of mortgage lending rise. This is because you will have to pay off existing personal mortgages and take out new commercial mortgages. Finance costs of commercial mortgages and buy-to-let mortgages tend to be more expensive due to higher rates of interest than personal mortgages.

Other costs to consider

When running a limited there will be additional costs to consider such as legal fees and accountancy fees for things like accounts preparation, completing Corporation Tax Returns and Confirmation Statements etc. However, depending on your circumstances, we often find that the savings made via a limited company often far outweigh these additional costs.

Conclusion

We advise landlords on running their property portfolios within a limited company as it is generally the most tax-efficient option. Many landlords see the benefit of undertaking a transfer if they have begun their landlord business personally owning property initially.

We often find that people inherit a second property, or decide to buy a second property but don’t consider the many benefits and tax savings of property ownership within a limited company.

Seeking advice from our qualified tax team will ensure you undertake the transfer properly and avoid unnecessary charges. Please contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk. today to find out more about transferring property to a limited company or any other property related questions you have.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.