Incorporating properties into a limited company

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

5th June 2022

Incorporating properties into a limited company

Incorporating buy-to-let investments into a limited company can save landlords significant amounts on tax.

Incorporation relief can help mitigate Capital Gains Tax (CGT) but requires careful planning.

It is important to understand the pros and cons of incorporating properties into a limited company structure for long-term tax benefits.

What are the basics of incorporating properties into a limited company?

As property accountants serving thousands of UK landlords that purchase buy-to-let properties, we know that incorporating buy-to-lets into a limited company can be seen as a challenging and complex process.

Putting buy-to-let investments in a company offers a lower tax rate on retained profit.

If this profit is reinvested after paying the lower rate of corporation tax (currently 19%), then faster growth in the company can be gained.

Transferring a letting business to a company will involve transferring the ownership of the property to the incorporated entity.

This raises two key considerations:

Unless the buy-to-let is of low value, the company will need to pay Stamp Duty Land Tax (SDLT) on the value of the investment transferred.

If the buy-to-let has increased in value since being acquired, the transfer to the company will give rise to a gain chargeable to Capital Gains Tax (CGT) payable at the point of transfer.

After taking into account SDLT, CGT, and the costs associated with transferring a buy-to-let investment into a limited company, the tax advantages of operating the lettings through a company will still make incorporation beneficial.

Incorporating buy-to-lets into a limited company is best suited to those with a high income, multiple properties, and the intention to hold them long-term with reinvestment of profit.

Incorporate your properties into a limited company

Many of our clients have moved their property portfolios into a limited company to save income tax. Is it time for you to avoid the Section 24 mortgage interest relief cap?

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What is S162 Incorporation Relief?

S162 Incorporation Relief postpones the payment of CGT until a landlord sells or disposes of their company shares.

If the company isn’t sold, CGT is delayed indefinitely.

According to HMRC, landlords must meet the following criteria to be eligible for incorporation relief:

* be a sole trader or in a business partnership

* transfer the letting business and all associated assets (except cash) in return for shares in the incorporated company.

Utilising S162 incorporation relief helps to offset the requirement to pay CGT when converting a letting business to limited company status.

When being incorporated, investment equity is converted into company shares.

The value of these shares can be offset against the capital gain by using S162 corporation relief.

No CGT is payable if the buy-to-let portfolio’s equity is more than the capital gain.

How does a BTL property business qualify for incorporation relief?

According to HMRC, to be eligible for incorporation relief, you do not have to claim for it: you will get it automatically if eligible.

To work out the amount you need to pay CGT, deduct the gain you made when selling your business from the market value of the shares you received.

You transfer your buy-to-let business in return for shares worth £100,000. You make a profit of £60,000.

You later sell the shares and need to work out the capital gain – their cost for the CGT calculations is £40,000. (£100,000 – £60,000).

Buy-to-let businesses need to show HMRC that they are genuine businesses and not just investment vehicles to qualify for incorporation relief.

This means providing evidence (including actively managing their tenants and properties) to highlight that the business owners are not just passive investors.

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Why move properties into a limited company?

If you are operating a substantial lettings business, the main benefit of using a limited company to hold your buy-to-lets is the lower corporation tax rate of 19% paid on profits rather than income tax rates of 20% basic, 40% high rate and 45% at the additional rate.

Section 24 means that most high-rate taxpaying landlords are paying nearly 60% property tax because they can no longer offset mortgage interest against their income.

In a limited company, landlords can offset all mortgage interest costs.

Using a limited company and alphabet shares means landlords can allocate tax-free dividends to adult children, spouses and parents.

There are also ways in which buy-to-let investors can extract up to £20,000 tax-free cash from the limited company.

It is not just a case of forming a limited company and transferring your buy-to-let by signing it over.

Landlords must sell their property to the new company, which will attract certain costs, such as CGT.

Owning a buy-to-let portfolio through a limited company does offer significant benefits.

These include reducing the rate of tax applied to rental investments and avoiding the restriction on tax profits for mortgage interest that applies to buy-to-lets held personally.

Incorporate your properties into a limited company

Many of our clients have moved their property portfolios into a limited company to save income tax. Is it time for you to avoid the Section 24 mortgage interest relief cap?

Learn more

How does incorporation relief save on tax?

Incorporation relief means buy-to-let investors do not pay any CGT until they sell or dispose of the shares.

When a property portfolio is transferred to a company, the CGT position is no different to selling the buy-to-lets to a third party.

Base costs (purchase price and capitalised improvements) are deducted from the open market value of the buy-to-let investments to establish a capital gain.

This gain is then added to all other income and taxed at 18% for basic rate taxpayers or 28% for higher rate taxpayers.

By claiming S162 incorporation relief, CGT is significantly reduced or completely removed.

When building a buy-to-let portfolio, profit is often retained for reinvestment.

These profits are taxed heavily for individuals.

Companies only pay 19% corporation tax, and companies are not affected by restrictions on finance cost relief.

Most non-resident landlords pay tax in dividends from UK companies in their country of residence.

This can result in significantly lower income tax, sometimes none, dependent on the country of residence.

Incorporation relief can also provide property investors with greater flexibility in terms of Inheritance Tax planning.

Liabilities are limited to the value of the buy-to-let company.

Mortgage lenders sometimes require personal guarantees, but many other liabilities are ring-fenced due to incorporation.

Incorporation also provides the ability to raise funding by adding new shareholders.

Read this article to learn more about how incorporation relief can save on tax.

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What are the pitfalls of incorporating a letting business?

Transferring buy-to-lets to a limited company has several tax consequences on incorporation.

Like any transfer of assets between connected parties, the transaction is deemed by HMRC to have taken place at market value (MV).

Transferring buy-to-let investments from a private landlord to their newly-incorporated company will create taxable capital gain on the landlord.

Incorporation relief is available as long as the rental activity is a business, with buy-to-lets in it being let on commercial terms with business activities taking place rather than the passive holding of investments.

The letting business must be transferred as a going concern.

The main consequence of incorporation relief is that the cost base of its shares for CGT purposes is reduced by the amount of the gain relieved on incorporation.

If incorporation relief is not beneficial, it can be disclaimed.

No special SDLT relief is available for buy-to-lets transferred by incorporating an individual’s existing business.

Companies incorporated from a partnership may significantly reduce or eradicate their SDLT bill.

This is because of special rules granting SDLT exemption in transactions between a partnership and persons connected.

Anti-avoidance legislation applies in cases where a partnership is created with the sole purpose of avoiding SDLT.

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