Since the change in how finance costs are treated for personal income tax, holding properties within a limited company has become a more tax-efficient option.
Limited companies can acquire properties similar to individual buy-to-let purchases. However, transferring existing properties into a limited company is complex. The most tax-efficient method is utilising incorporation relief, which exempts capital gains tax or stamp duty if specific criteria are met during transfer.
However, due to the complicated rules and potential tax traps in transferring your property to a limited company, we strongly recommend taking tax advice before moving any properties owned.
If a transfer is completed without using a tax advisor, it could lead to a significant tax bill further down the line. To find out how our expert property accountants can help you move a property into a limited company, contact us today!
Can property ownership be transferred to a limited company?
Landlords can move property to a limited company. In most cases, the limited company that properties are being transferred to is what’s known as a Specialist Purpose vehicle (SPV).
An SPV is a new company specifically formed for the purpose of holding property. However, it is more complex than changing the bank account in which rental income is paid.
Since a limited company is considered a legally separate entity, the ownership of the property must be physically transferred to the company, allowing the special purpose vehicle (SPV) to own the property in its own right.
What ways are there to move property into a limited company?
The most tax-efficient way of moving property into a limited company is through what is known as incorporation relief.
In most situations, in HMRC’s eyes, property income is deemed to be investment income and not trading income. However, if you can demonstrate that your property portfolio is actually a trading property business, then no capital gain tax or stamp duty is payable on the point of transferring rental properties into a limited company structure.
There are strict rules on what HMRC deem as a trading property business, and this was tested in the Ramsay tax case. You must demonstrate that you work at least 20 hours a week within the business, and the property portfolio must be substantial enough to justify 20 working hours per week.
If incorporation relief is not an option, you can still transfer your property business, as there may still be tax advantages.
The main pitfall to avoid when transferring ownership to a limited company is that, in most cases, the shareholders and directors are often the same people that held the properties in their own personal name. In HMRC’s eyes, these are connected persons, so even if the properties are transferred for £1 for tax purposes, they are deemed to have taken place at market value.
One concern that buy-to-let landlords often have is that the company will need more funds to pay for the full open market value of the property investments. This is a common situation, and any consideration not received in cash or funded by borrowing is credited as a loan account to be taken tax-free once the company has sufficient funds to repay the loan.
Taxes to consider when transferring property ownership to a limited company
When transferring your property to a limited company, the following taxes need to be considered:
Capital gains tax
Unless incorporation relief applies, then capital gains tax is payable on the difference between what you paid for the buy-to-let property and what the property’s market value is at the date of transfer.
Basic rate taxpayers pay capital gains tax at 18%, and higher rate taxpayers at 28%. Capital gains on UK property have to be declared and paid within 60 days of the transfer.
Corporation tax
The main advantage of holding buy-to-let property in a limited company is the tax relief on mortgage interest and finance costs, particularly for higher-rate taxpayers.
The corporation rate for companies with profits below £50,000 is 19%; even the higher corporation tax rate of 25% is still much lower than the higher income tax rate of 40%.
Stamp duty land tax
Limited companies are liable to pay stamp duty, which is calculated based on the property’s market value at the time of transfer. In cases where specific criteria are met, tax relief is granted when incorporating a partnership in exchange for shares; Typically, this is done alongside the utilisation of incorporation relief.
Is it worth putting property into a limited company?
As every case is different and dependent on personal circumstances, we recommend taking advice before moving any buy-to-let properties into a company.
Variables that need to be considered include:
- the profits of the property business
- any other income
- the value of the property portfolio
- tax reliefs available to your personal circumstances
- the original purchase price of the property portfolio
- the costs involved with transferring property
- the ongoing costs of a limited company
Read our informative blog to learn more about the factors you should consider before buying property through your limited company!
Advantages of moving property into a limited company
The main advantages of holding your property in a limited company include the following:
- Tax savings – as well as corporation tax being at a lower rate than personal tax, a company benefits from mortgage interest and finance costs being a tax-deductible expense.
- Flexibility – this relates to how you draw income from the company. If the long-term goal is to build a portfolio, profits can be left in the company to fund future purchases.
- Inheritance tax planning – once incorporated, a limited company can provide opportunities to reduce future potential inheritance tax liabilities.
Disadvantages of moving a property into a limited company
The main disadvantages of moving property into a company include the following:
- Costs of incorporation – as well as the potential capital gain tax and stamp duty, there are the associated legal and professional costs.
- Re-mortgaging properties – in most situations, personal mortgages can not be transferred to a company. Therefore, new company mortgages need to be taken out at a higher rate of interest. The expiration of early redemption charges needs to be considered when planning the timing of the move.
- Personal use – you must pay tax on any personal use of the property under benefit-in-kind rules. This can be complicated when one of the properties is a holiday home.
How can Spotlight’s property accountants help you?
At Spotlight Accounting, our property experts thoroughly analyse the unique circumstances of each landlord, assessing the potential tax savings they could achieve by transferring properties to a limited company. We then weigh these savings against the associated costs for a comprehensive evaluation.
Each case is unique, and in some circumstances, a hybrid of personally owned properties and some properties held in a company can be the most tax-efficient option.
We can also advise whether you meet the criteria for incorporation relief and help navigate you through the process.
In Summary
Property can be transferred into a limited company, offering significant tax savings. However, it is crucial that you consult with a tax advisor, as the rules are complex and, if not followed correctly, can lead to large unexpected tax bills further down the line.
Our expert team has a track record of working with landlords, so get in touch to see how we can help.
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