Reduce Property Gains Tax, Property Developers, Property Investors

Transfer Property To Limited Company

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

14th July 2016

The advantages: Transfer property to a limited company with the aid of a property tax advisor

Thankfully we identified a solution by incorporating his property portfolio into a limited company. We were able to put in different share classes so that his adult children could receive tax-free dividends. His property profits were less than half because we incorporated his property portfolio into a limited company.

Please note that a limited company used for property investments is a Special Purpose Vehicle (SPV). Typically, a limited company that is used for the sole purpose of buy to let property investments will use a Companies House SIC code of 68209. This code is used to inform the public that the company carries out the activity of letting and operating of own or leased real estate.

What is the point of a property portfolio if the only people that benefit are the banks (interest) and HMRC?

Another client had over £3million worth in his property portfolio, and it was identified that he had a terminal disease. We determined that £1.6m IHT would have to be paid to HMRC.

How on earth do you plan to pay £1.6m?

Thankfully, we identified a lot of simple, legal, and practical plans to reduce the inheritance tax liability from £1.6m to £400,000. It is still a lot of money to pay HMRC, but it was worth hosting the call to save £1.2m. The solution was the creation of freezer shares and growth shares in the limited company to prevent future asset growth from being in the hands of the parents. The growth was immediately passed onto the children. We were also able to transfer shares to children using trusts to utilise the IHT lifetime allowances of both parents to transfer £500,000 shares to the children, which was controlled within a discretionary trust.

Many property tax questions can be answered by social media, forums, friends etc. Do they give you the correct advice the lasts?

It is easy and free to get advice, but what will it cost you in the end? We have seen people set up limited companies and have the incorrect share structure. They solved one tax problem but created another more significant tax issue when they died.

I hope you can see the importance of working with a property tax advisor when thinking “should I transfer property to a limited company?”.

Incorporate your property portfolio to save tax

You may be looking to incorporate your property portfolio into a limited company. This can be a costly in terms of money and time but there are many tax savings to be had

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The disadvantages: Transfer property to a limited company

We have heard many concerns about incorporating a property portfolio into a limited company such as

“You can’t incorporate as you will pay Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT)”.

Our answer: There are many tax reliefs that you can obtain to relieve you from both CGT and SDLT when incorporating your property portfolio into a limited company

“It is not tax efficient as you will pay tax twice.”

Our answer: You will indeed pay corporation tax when profits are made in a limited company. It is also true that you will pay income tax on money taken out of the limited company. That said, no income tax will be paid if you leave the money in the limited company and reinvest in a new property.

“There is a lot of costs to incorporate your property portfolio.”

Our answer: Costs to move a property portfolio into a limited company can cost anywhere between £10,000 to £25,000. We agree that this is a lot of money. However, you need to invest to save. You may get sufficient payback in just three years if you save £10,000 in tax per year. To boot, you will also benefit from some of the Capital Gains Tax and Inheritance Tax savings using a limited company

“There is a lot of work to incorporate and accountancy fees to maintain the limited company.”

Our answer: This is equally true. There are additional accountancy fees. There is quite a bit of work to do to move your property portfolio into a limited company. Once done, though, there could be a lot of tax benefits in the immediate term of paying less income tax and long term with the reduction in inheritance tax

“I have to remortgage my properties if I move them into a limited company.”

Our answer: You can speak with your bank to move the mortgages to your limited company. They do not need to charge you administration charges. You could also refinance your properties and pull more money out when the properties are incorporated. Some banks do not require you to tell them within their terms and conditions.

“There is greater administration by owning a limited company.”

Our answer: There are additional administration duties as a limited company director and shareholders. This is because you need to submit accounts to Companies House and a CT600 corporation tax return to HMRC. There is also a requirement to complete an annual confirmation statement to inform Companies House who the directors and shareholders are. There is another requirement to complete an Annual Tax on Enveloped Dwellings (ATED) that must be submitted to HMRC. Yes, there are a lot of extra pieces of administration. We must always look at the big picture and compare the costs and administration to the tax savings achieved by transferring properties into a limited company.

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Capital gains tax incorporation relief - Ramsay 2013 case law

Typically, you pay Capital Gains Tax (CGT) when you sell a property. This is based on the sales price, less the purchase cost and any capital items. You would have an Annual Exemption (EA), which was £12,300 for 2021/22. You will also pay CGT if you are transferring property to a limited company. This is based on a market value less purchase costs and capital items. This can all be avoided using a tax relief called Incorporation Relief under s162 Taxation and Chargeable Gains Act 1992 (TCGA) legislation. Provided that you meet certain criteria, which our experts will help you determine, will relieve you from having to pay CGT when you transfer properties to a limited company.

As the 2013 Ramsay case  showed, you can mitigate CGT provided you can demonstrate that:

– The property business is a genuine activity that provides income from the profits being generated from the activity.

– The people in the business carry out work such as performing repairs, collecting rents and dealing with tenants. The Ramsay case shows that they worked 20 hours in the business. We need to be mindful that the court decision was a qualitative measure rather than quantitive. Saying that you spend 20 hours per week going to network events, courses and estate agents misses the point that you do not look after the tenants or the maintenance of the property. As such this time is irrelevant. You need to look after the tenants and not use a letting agent. Plus you should organise the maintenance and repairs of the property, again not a letting agent.

– You can use a letting agent to find tenants but you should then take over the management activities.

If you can demonstrate the above then you can claim incorporation relief, which means that you pay no CGT. This is great news for landlords that are thinking about transferring property to limited company.

Incorporate your property portfolio to save tax

You may be looking to incorporate your property portfolio into a limited company. This can be a costly in terms of money and time but there are many tax savings to be had

Online form

Stamp duty: Transfer property to limited company

Stamp Duty Land Tax (SDLT) is a tax determined by a conveyance solicitor. Stamp duty on transfer property to a limited company is likely in most scenarios.

It is based on the market value of the property.

There is an additional 3% SDLT higher rate on top of the normal SDLT banded rates. This could be too costly and mean that the incorporation of your properties does not make financial sense. Similar to CGT, an SDLT tax relief may be applied. Provided that you meet certain criteria, which our experts will help you determine, will relieve you from having to pay SDLT when you are transferring property to a limited company under Finance Act 2003 Schedule 13.

Can i sell my house to my limited company is this the same as a transfer property to a limited company?

Many UK landlords that wish to transfer property to a limited company may ask, “Can I sell my house to my limited company?”

It is possible to sell a house to a limited company. One of the advantages of doing this is that you would benefit from Private Residence Relief to mitigate Capital Gains Tax if you lived in the property for most of the time you owned the property.

This means that people who lived in a home and wish to sell it to a limited company will not pay Capital Gains Tax.

This is useful for many people who wish to keep their former home but wish to buy another home. This is good news for those that ask “can i transfer ownership of my house to a company?” The answer is a yes without the CGT.§

People buying a home in the UK will pay the 3% Stamp Duty higher rate if the first home is not sold in the process. Selling the first home to a limited company means that the 3% Stamp Duty higher rate will not be charged against the new house.

The limited company buying a home from an individual will pay the regular Stamp Duty rates and the 3% SDLT rate. This may still be cheaper than paying the 3% on the second home.

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