Transfer Properties into a Limited Company & Save UK Income Property Tax

Simon Misiewicz

Expat & Property Tax Specialist

14th July 2016

Capital gains tax incorporation relief - Ramsay 2013 case law

Have you heard the horror stories about the heavy tax burden when transferring Properties into a Limited Company?

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, £6,000 for 2023-24, and £3,000 for 2024-25. You will also pay CGT if you transfer property to a limited company. This is based on a market value of fewer 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, it 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 generated.

– The people in the business carry out work such as performing repairs, collecting rent 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 a quantitive one. 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 take over the management activities.

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

Stamp duty: Transfer property to limited company

Stamp Duty Land Tax (SDLT) is a tax determined by a conveyance solicitor. Stamp duty is payable on a transfer of property to a limited company.

Stamp Duty is based on the market value of the property.

There is an additional 3% SDLT higher rate than normal SDLT banded rates. This could be too costly and mean that incorporating 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, it will relieve you from paying SDLT when transferring property to a limited company under Finance Act 2003 Schedule 13.

Incorporation relief means you do not pay Stamp Duty when transferring property into a limited company.

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 live 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.

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

Thankfully we identified a solution to solve the Inheritance Tax issues of owning buy-to-let investments by incorporating a property portfolio into a limited company. We can create different share classes so that adult children can receive tax-free dividends. 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 is letting and operating owned or leased real estate.

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

One client had over £3 million 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 on to 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, controlled within a discretionary trust.

Social media, forums, friends etc, can answer many property tax questions. Do they give you the correct advice that 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 with incorrect share structures. 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?”

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. Incorporation relief mitigates both SDLT & CGT.

“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 it in a new property.

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

Our answer: Moving 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 three years if you save £10,000 in tax per year. Using a limited company, you will also benefit from some of the Capital Gains Tax and Inheritance Tax savings.

“There is much work to incorporate and accountancy fees to maintain the limited company.”

Our answer: This is equally true. There are additional accountancy fees. Moving your property portfolio into a limited company is a lot of work. Once done, you benefit from paying less income and inheritance tax.

“I must 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. You must 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. Another requirement to complete an Annual Tax on Enveloped Dwellings (ATED) 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.

Frequently Asked Questions (FAQ)

How do I transfer a property to a limited company?

A transfer of a property to a limited company is a matter of the conveyance process working alongside your solicitor

Can I gift a property to a limited company UK?

It is possible to gift a property to a limited company. However, if you own part of the company, it will still be treated as a transfer of market-value property. This means you will still need to pay Capital; Gains Tax (CGT), and the limited company will pay Stamp Duty Land Tax (SDLT) as part of the transfer.

Is it worth putting property into a limited company?

Transferring property from your name into a UK limited company has many tax benefits. There is a reduction in income tax. Section 24 mortgage interest relief does not affect limited companies. However, you need to trade these tax benefits against the CGT, and SDLT paid on the transfer.

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