Incorporating your property business can be attractive. For one, mortgage interest is deducted fully from taxable proﬁt (instead of tax relief being restricted for personal holdings). Higher yields (net of tax) can also be achieved on property portfolios due to the relatively low corporation tax rate of 19% to 25%, compared to up to 45% in income tax.
But transferring property into companies constitutes a disposal by the individual, crystalising both a capital gain if the market value has increased since acquisition, and stamp duty land tax (SDLT).
A key problem for landlords is that, as no actual sale takes place, the incorporation does not generate any proceeds from which to pay a potentially large tax bill.
However, capital gains tax can be oﬀset through incorporation relief (IR). This allows a gain to be deferred into the new company. To qualify for IR, the portfolio must constitute a business and all assets must be transferred as a going concern in exchange for shares in the new company.
Relief is only available from SDLT if the portfolio is transferred from a partnership. A partnership is a business that is carried out by two or more people and for this purpose and, in addition to demonstrating that a business exists, the partners of a partnership must show that they are in business together.
This means they must each – that is separately – have suﬃcient scale to their property activities to indicate they are actively in business, rather than just holding investments. It is advised to have a partnership agreement, a partnership bank account, and have registered the partnership with HMRC.
It’s also important to note that it is not enough to just own properties and collect rent. Anti-avoidance rules are in place to stop partnerships from being formed simply to beneﬁt from SDLT relief.
Finally, you must plan carefully, as once the transfer of the business is made it cannot be reversed. Should HMRC determine that a business does not exist, then CGT and SDLT charges will follow.
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For more information on how IR and SDLT relief work, please get in touch with your usual Shipleys contact or one of the specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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