We often have clients who are looking at transferring property to a limited company and want to know the advantages and disadvantages of this option.
Transferring property to a limited company can have benefits including tax savings as paying corporation tax can be lower than paying income tax, tax credits on mortgage interest, the ability to claim allowable expenses and limited legal liability.
In this blog we look at the pros and cons of transferring your property to a limited company and the most tax efficient option for property ownership.
Ways of holding investment property
There are three key ways that you can hold investment properties. These are as follows:
- As an individual in your personal name.
- Through a limited company.
- Through a trust.
Transferring personal properties into a company
Incorporating a personal property portfolio into a limited company can provide tax benefits if done correctly and with professional tax advice. A limited company is a separate legal entity to an individual and therefore attracts different tax charges that can often be lower than some personal tax rates.
Landlords should be aware that transferring personal properties to a limited company without expert advice could trigger substantial tax charges if not done correctly.
What are the advantages when you transfer property to a limited company?
- Expenses: When you own property through a limited company, you can deduct allowable expenses and mortgage interest from your rental income to reduce the amount of profit and thereby the amount of corporation tax you pay. For more information on limited company allowable expenses click here.
- Mortgage Interest: Landlords can no longer deduct any mortgage expenses from their rental income to reduce their tax bill. However, there is now a tax-credit, that is claimable for limited companies which is 20% of mortgage interest payments.
- Corporation tax is lower than personal income tax. The rate for corporation tax is 19% - 25% (dependent on profits). Rates for personal income tax are 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
- Your legal and financial liability will be minimised if there are legal issues or financial losses within the company (unless you have given personal guarantees for borrowing).
- There are potential IHT benefits to incorporation. The use of tailored types of shares may offer long-term IHT protection of future growth in the value of the properties.
- Incorporation relief and deferral of capital gains tax (CGT).
- Funds after tax can be retained as ‘reserves’ and later reinvested into properties. This can be paid out as dividends or used to top up director pensions.
- There can be personal tax savings if you undertake tax efficient profit extraction from the limited company vs the personal tax you pay as a sole trader.
- Landlords can add their spouse (for example as a non-executive director or shareholder) for further tax benefits.
Lets look at some of the main points above in more detail.
Since April 2020, Section 24 interest relief restrictions meant that landlords could no longer deduct any mortgage expenses from their rental income to reduce their tax bill. However, they now receive a tax-credit, based on 20% of mortgage interest payments. This is still a huge incentive to transfer property into a limited company.
Note: If there is an existing mortgage on a property, then it isnt guaranteed that the mortgage lender will allow the property to be moved into a limited company. Speak to your mortgage lenders first before moving property into a limited company.
Stamp duty land tax (SDLT)
Stamp Duty Land Tax (SDLT) will have to be paid based on the open market value of the property at the point of transfer, meaning an initial financial outlay to consider when transferring the property. Additionally, the company will have to pay the 3% surcharge applicable to residential properties. The transfer could be beneficial in cases, where an individual/s is buying a second home and wants to retain their current home for rental purposes. If the current residence is transferred to a limited company before purchasing the new home, the transaction will not be subject to the 3% higher rate applicable to purchase of second residential properties.
Albeit, 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.
Please read our blog here for more details.
Company property rental profits are taxed at between 19% and 25% corporation tax, compared to the personal tax rates for individuals of income tax rates of between 20% and 45% or capital gains tax rates (CGT) of between 10% and 20%
Incorporation Relief and capital gains tax
If you transfer the whole property business to a limited company, you can then receive shares in that company in exchange for the properties. At this point, capital gains tax is not triggered because the new shares in the company have a reduced base cost for tax purposes, equivalent to the original cost of the properties. However, future disposal of those shares could trigger capital gains tax based on that value.
Incorporation relief is available to property businesses but not to those who merely own property investments. HMRC generally accepts that a business exists where a person works 20 hours a week or more on the properties. The property portfolio should contain a sufficient number of properties to justify the time spent working in the property business. The whole property business must be incorporated as a going concern to qualify for the relief.
Incorporation Relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.
INCORPORATION RELIEF Eligibility
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 would acquire the properties at their current value and if the company disposed 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)
For IHT purposes, your estate owns the shares in the limited company, and the value of those shares reflects the value of the properties owned by the company. However, having a limited company property business can potentially provide IHT savings. This may be done by setting up a Family Investment Company or via loans and directors loan accounts, which could also be used to reduce IHT exposure. Seek professional tax advice before taking any action.
When you set up a limited company, due to the legal separation between individuals and the business, as the owner of a limited company, you are not responsible for company liabilities. You have no personal responsibility over any legal issues or for the actions of your fellow company members. Within a limited company, you are also not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.
What are the disadvantages of transferring property to a limited company?
Before you make the decision to transfer your properties into a limited company, you need to be aware of potential disadvantages and seek professional advice. The advantages of owning property in a limited company, may be dependent on the number of properties you own or plan to own.
The disadvantages can be as follows:
- Ownership: When you transfer your rental properties to a company, they will no longer be owned by you but by the company. You will own shares in the company, but you wont be able to personally mortgage an asset you don’t own, and your mortgage company may not agree to transfer their mortgage over to a limited company.
- Mortgage costs: As part of the transfer process, you will likely have to pay off the existing personal mortgages and take out new commercial mortgages, this is likely to be requested by your mortgage company. Finance costs of commercial mortgages tend to be more expensive due to higher rates of interest. This will therefore increase your mortgage costs.
- Stamp Duty Land Tax (SDLT): This will have to be paid based upon the open market value of your properties at the point of transfer, meaning an initial financial outlay to consider when transferring.
- Other costs: There are additional costs involved when running a limited company, such as accountancy fees to prepare annual accounts and file these with Companies House and corporation tax returns etc. However, savings often outweight these additional costs.
Many landlords opt to run their property portfolios within a limited company to gain the benefits above. There can be many benefits and tax savings when transferring your properties into a limited company, but this will depend on your circumstances. Doing so without professional tax advice could trigger additional tax charges.
We recommend you work with a professional accountant and tax adviser such as dns accountants to ensure you undertake the transfer properly and avoid unnecessary charges.
For professional help and advice and to avoid falling into unnecessary tax traps when transferring your property into a limited company, contact our team on 03300 886 686, or email on email@example.com.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
Stay up-to-date with the latest news affecting small businesses, get business tips and tax saving advice.