Incorporating a letting business

Should I transfer my existing properties in a new company ?

Three taxes are considered when considering the question of incorporating a letting business:

  1. Corporation/Income Tax
  2. Capital Gains Tax ; and
  3. Stamp Duty Land Tax (SDLT).

1. Corporation/Income Tax

  • Corporation tax rates are lower than income tax rates
  • Continued tax relief on mortgage interest
  • Flexibility in timing of profit extraction.

 

2. Capital gains tax (CGT)

Transfers between connected parties are deemed at market value (MV) but there is `incorporation relief ` available.

Incorporation relief

No CGT payable if transfer is for shares in the business.

Eligibility conditions:

  • Rental activity is a business. Main case law here is `Ramsay Vs HMRC` to determine whether the activity is really a business. HMRC guidance CG65715 states the activity should be carried for around 20 hours a week personally.

    Please note HMRC no longer provides non-statutory clearances as conformation that a particular property letting is sufficient to qualify as a business.

  • Consideration in new issued shares only – not a credit in director’s loan account.
  • Transferred as a going concern i.e. profitable business.

Please note annual exemption allowance, currently £11,700 not available to companies

3. SDLT – no relief available.

SDLT payable on MV, irrespective of consideration actually paid.

Future purchase – In case buyer is a company it pays 3% surcharge (threshold £40k) in all cases, whether or not company owns another property or not. Thus landlords cannot avoid the 3% surcharge by buying properties via company.

SDLT Calculator

Practical considerations:

  • Refinance costs
  • Increase in interest rates – as bank usually charge more to limited company landlords.
  • Huge SDLT bill on transfer of assets.
  • Other fees – Lawyer, accountant, valuer etc.

Lastly, there is no guarantee HMRC will not change the rules for finance costs relief for companies in the future.

Conclusion:

I think the sensible approach will be to leave the existing portfolio as it is but to buy new properties in a limited company if the aim is to expand the portfolio rather than profit extraction from the business. This will require another article in greater detail.

PS – There maybe inheritance tax implications as well which are not considered above.

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