Incorporating properties into a limited company Landlords may look at moving their property portfolio into a limited company via Incorporation Relief, saving on Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT).Property Incorporation can offer many tax relief benefits for landlords looking to reduce their tax liabilities on a portfolio business. What are the basics of incorporating properties into a limited company? Limited companies usually pay lower taxes on rental profits compared to landlords. UK limited Companies are not affected by the Section 24 restrictions on tax relief for mortgage interest that applies to individuals. Incorporation can make a portfolio business more tax-efficient and gain tax relief. Company property rental profits and residential property capital gains are taxed at 19% CorporationTax compared to the individual Income Tax rates of up to 45% or Capital Gains Tax (CGT) at up to 28%. Another key point about incorporating properties into limited companies is that no personal Income Tax liability exists on company rental profits reinvested into mortgage capital repayments, property improvements or acquisitions. Income Tax only applies to profits that are extracted for personal use. The incorporation of a property portfolio business can resolve this issue. Limited companies face no restriction on tax relief for mortgage interest, unlike individuals, who may pay up to 45% tax on rental profits without deducting interest and then receive only a 20% tax credit for some of the mortgage interest paid. For limited companies, the rules are different within a portfolio. If you own a property portfolio within a limited company, you can still claim 100% of your finance costs against turnover. This could be beneficial if you own multiple properties and are a higher-rate taxpayer. Moving properties into a limited company is classed as a sale and needs to be done at full market value. Incorporation of a property portfolio business works well for some landlords. Why Transfer Properties To A Limited Company? A limited company is a separate legal entity and pays tax in its own right. Tax rates for limited companies are favourable compared to personal income tax rates. Incorporation can help to make a portfolio business more tax-efficient for a property investor. In certain cases, holding properties within a limited company can provide an extra layer of asset protection. It can make it challenging for creditors to access said assets of the company in the event of financial difficulties. Transferring personal properties from a portfolio to a limited company without proper advice could trigger significant tax liabilities. Capital Gains Tax (CGT) would be payable as if you had sold a property at full market value. The capital gain is calculated as the open market value of the property less the acquisition cost and capital improvements. Stamp Duty Land Tax (SDLT) would also be payable based on the property’s market value at the time of transfer into a limited company. Mortgages also need to be replaced on transfer, although this can be deferred until the end of any fixed mortgage period. Limited company mortgages are usually more expensive than personal mortgages, but the overall tax relief savings outweigh the cost. It is worth considering the incorporation of your portfolio business. What personal income can be taken from a limited company? Limited Companies has to submit annual accounts and corporation tax returns. A self-assessment tax return will no longer include property profits but must consist of your director’s salary and shareholder dividend income. Your personal income will probably contain director pay and shareholder dividends. A limited company gets tax relief on your director pay, but not on dividends. If you set your director’s pay at the correct level no National Insurance (NI) is payable, but the year qualifies towards your state pension. Personal landlord income cannot do this without paying voluntary NI contributions. As a limited company shareholder, the first £2,000 of your dividend income is taxed at 0% and then 8.75% when your overall income is less than £50,271. The £2,000 dividend allowance at 0% will reduce to £1,000 from 6 April 2023 and will be halved again the year after Incorporation can make a property portfolio business an efficient way of saving tax. What is Section 162 Incorporation Relief? Taxation of Chargeable Gains Act 1992 (TCGA92) S162 relief is available to property businesses but not to those who merely own property investments. When relief is available, CGT liability is not triggered. The difference between a property portfolio business and property investment is the number of properties and the amount of time the owner works in the business. HMRC accepts that a business exists where a person works 20 hours a week on the properties. The property portfolio business should contain a sufficient number of properties to justify the time spent working in the property business. Incorporation relief can be often referred to as a form of roll-over relief. This is because it rolls over the capital gains tax liability to a later date when the company eventually sells the assets. The whole property portfolio business has to be incorporated as a going concern to qualify for tax relief. There are anti-avoidance rules in place to prevent the abuse of incorporation relief. For example, there can be artificial arrangements designed solely to obtain the tax benefits. HMRC will likely challenge such arrangements. What are the disadvantages of transferring properties to a limited company? You will trigger SDLT for the limited company and CGT for yourself. Optimise’s expert accountants can advise on the best way to structure it, if any tax reliefs are available. Accountancy fees will go up for a limited company compared to a sole trader. Accountancy fees will go up for a limited company compared to a sole trader. Finance will be more expensive if the properties are owned within a company rather than a personal name. The incorporation of a property portfolio business is still a popular choice among many investors. Why choose Optimise Accounatnts Here at Optimise Accountants, we provide a range of accounting services including tax planning, bookkeeping and financial advice. Our team of experienced professionals are dedicated to helping you assess and optimise your financial situation. We offer personalised support to ensure that our services align with your specific needs and targets. If you wish to learn more about Optimise Accountants, then check out our About Us page for more information. Are limited companies exempt from Inheritance Tax? Companies are often protected from Inheritance Tax (IHT) leading some to assume that incorporating a property portfolio will avoid IHT. The tax reliefs typically available to company owners do not apply to people who have incorporated a property portfolio business into a company. If the estate in question includes agricultural property, agricultural property relief can provide relief from inheritance tax. This can apply to farming businesses, for example. If you incorporate a property business into a company, the value of those properties is still in your estate for IHT purposes. The shares you own will reflect the value of the assets held by the company. It may be that the use of tailored types of shares may offer long-term IHT protection of future growth in the value of the properties. In addition, borrowing on the property portfolio can sometimes create a loan account that will reduce exposure to IHT.
Incorporating properties into a limited company Landlords may look at moving their property portfolio into a limited company via Incorporation Relief, saving on Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT).Property Incorporation can offer many tax relief benefits for landlords looking to reduce their tax liabilities on a portfolio business. What are the basics of incorporating properties into a limited company? Limited companies usually pay lower taxes on rental profits compared to landlords. UK limited Companies are not affected by the Section 24 restrictions on tax relief for mortgage interest that applies to individuals. Incorporation can make a portfolio business more tax-efficient and gain tax relief. Company property rental profits and residential property capital gains are taxed at 19% CorporationTax compared to the individual Income Tax rates of up to 45% or Capital Gains Tax (CGT) at up to 28%. Another key point about incorporating properties into limited companies is that no personal Income Tax liability exists on company rental profits reinvested into mortgage capital repayments, property improvements or acquisitions. Income Tax only applies to profits that are extracted for personal use. The incorporation of a property portfolio business can resolve this issue. Limited companies face no restriction on tax relief for mortgage interest, unlike individuals, who may pay up to 45% tax on rental profits without deducting interest and then receive only a 20% tax credit for some of the mortgage interest paid. For limited companies, the rules are different within a portfolio. If you own a property portfolio within a limited company, you can still claim 100% of your finance costs against turnover. This could be beneficial if you own multiple properties and are a higher-rate taxpayer. Moving properties into a limited company is classed as a sale and needs to be done at full market value. Incorporation of a property portfolio business works well for some landlords. Why Transfer Properties To A Limited Company? A limited company is a separate legal entity and pays tax in its own right. Tax rates for limited companies are favourable compared to personal income tax rates. Incorporation can help to make a portfolio business more tax-efficient for a property investor. In certain cases, holding properties within a limited company can provide an extra layer of asset protection. It can make it challenging for creditors to access said assets of the company in the event of financial difficulties. Transferring personal properties from a portfolio to a limited company without proper advice could trigger significant tax liabilities. Capital Gains Tax (CGT) would be payable as if you had sold a property at full market value. The capital gain is calculated as the open market value of the property less the acquisition cost and capital improvements. Stamp Duty Land Tax (SDLT) would also be payable based on the property’s market value at the time of transfer into a limited company. Mortgages also need to be replaced on transfer, although this can be deferred until the end of any fixed mortgage period. Limited company mortgages are usually more expensive than personal mortgages, but the overall tax relief savings outweigh the cost. It is worth considering the incorporation of your portfolio business. What personal income can be taken from a limited company? Limited Companies has to submit annual accounts and corporation tax returns. A self-assessment tax return will no longer include property profits but must consist of your director’s salary and shareholder dividend income. Your personal income will probably contain director pay and shareholder dividends. A limited company gets tax relief on your director pay, but not on dividends. If you set your director’s pay at the correct level no National Insurance (NI) is payable, but the year qualifies towards your state pension. Personal landlord income cannot do this without paying voluntary NI contributions. As a limited company shareholder, the first £2,000 of your dividend income is taxed at 0% and then 8.75% when your overall income is less than £50,271. The £2,000 dividend allowance at 0% will reduce to £1,000 from 6 April 2023 and will be halved again the year after Incorporation can make a property portfolio business an efficient way of saving tax. What is Section 162 Incorporation Relief? Taxation of Chargeable Gains Act 1992 (TCGA92) S162 relief is available to property businesses but not to those who merely own property investments. When relief is available, CGT liability is not triggered. The difference between a property portfolio business and property investment is the number of properties and the amount of time the owner works in the business. HMRC accepts that a business exists where a person works 20 hours a week on the properties. The property portfolio business should contain a sufficient number of properties to justify the time spent working in the property business. Incorporation relief can be often referred to as a form of roll-over relief. This is because it rolls over the capital gains tax liability to a later date when the company eventually sells the assets. The whole property portfolio business has to be incorporated as a going concern to qualify for tax relief. There are anti-avoidance rules in place to prevent the abuse of incorporation relief. For example, there can be artificial arrangements designed solely to obtain the tax benefits. HMRC will likely challenge such arrangements. What are the disadvantages of transferring properties to a limited company? You will trigger SDLT for the limited company and CGT for yourself. Optimise’s expert accountants can advise on the best way to structure it, if any tax reliefs are available. Accountancy fees will go up for a limited company compared to a sole trader. Accountancy fees will go up for a limited company compared to a sole trader. Finance will be more expensive if the properties are owned within a company rather than a personal name. The incorporation of a property portfolio business is still a popular choice among many investors. Why choose Optimise Accounatnts Here at Optimise Accountants, we provide a range of accounting services including tax planning, bookkeeping and financial advice. Our team of experienced professionals are dedicated to helping you assess and optimise your financial situation. We offer personalised support to ensure that our services align with your specific needs and targets. If you wish to learn more about Optimise Accountants, then check out our About Us page for more information. Are limited companies exempt from Inheritance Tax? Companies are often protected from Inheritance Tax (IHT) leading some to assume that incorporating a property portfolio will avoid IHT. The tax reliefs typically available to company owners do not apply to people who have incorporated a property portfolio business into a company. If the estate in question includes agricultural property, agricultural property relief can provide relief from inheritance tax. This can apply to farming businesses, for example. If you incorporate a property business into a company, the value of those properties is still in your estate for IHT purposes. The shares you own will reflect the value of the assets held by the company. It may be that the use of tailored types of shares may offer long-term IHT protection of future growth in the value of the properties. In addition, borrowing on the property portfolio can sometimes create a loan account that will reduce exposure to IHT.
