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Moving Real Property Into a Company: CGT & SDLT Planning

27 April 2021

This is an article about tax planning for existing property portfolios, planning for future property purchases and potential inheritance tax mitigation by moving a property portfolio from a partnership into a limited company without having to pay capital gains tax or stamp duty land tax.

The rules are complicated and involve mixed service professionals of accountants, tax advisors, solicitors, mortgage companies and brokers. However, if you would like more information please continue reading.

Recent tax law

Over the past few years there have been a succession of restrictions for tax relief and additional taxes levied on persons investing in residential property in an effort to level the playing field between first time buyers and those who already own more than one property.

From 1 April 2016, under the Finance Act 2016 section 128, as amended by Finance Act 2018 Schedule 11 and Finance Act 2019 section 44 a surcharge was introduced that meant that anyone who owns more than one property who buys another residential property and does not replace their main home will pay an additional 3% stamp duty land tax (SDLT) on the purchase price.

From 6 April 2017, Section 24 of the Finance Act 2015 a restriction was also brought in to limit the loan interest relief available to individual landlords to just 20% instead of the individual’s effective tax rate which might have been far higher at 45%. This restriction is being phased in over four years in 25% increments.

Specialist advice about your situation should be sought and the below is general indicative information which should not be seen as advice.

Buying property in a limited company?

As a result, many recent purchasers of residential property are considering buying through a limited company which would not be limited by the amount of tax relief available from the interest expense. Corporation tax is currently just 19% while the basic rate of personal income tax is 20% and so the benefit of a company would allow a 1% advantage in repaying back loans at that level but far greater if the individual taxpayer is a higher 40% or additional rate 45% taxpayer.

A company will also allow greater tax planning opportunities since you do not have to take income out of the company, presumably as dividends, unless you want to and presumably after you have repaid your startup cash as loan repayments first. However, apart from the current initial £2,000 tax free allowance dividends will then be taxed within the basic rate band at 7.5% and then 32.5% in the higher rate tax band and then 38.1% at the additional rate tax band. But in the future one might expect the rolled up cash to be more at this future time and end up still with a higher net return.

Personal Income TaxCorporation Tax
20%19%*

* - Corporation Tax Rates are due to change from 1st April 2023 with a 25% Rate for Profits over £250,000 but only 19% Small Company Rate for profits up to £50,000 and then a sliding scale for profits between £50,001 and £249,999.

Comparison of taxes as a partnership versus a limited company

LLP or partnershipLimited Company
Residential Property Portfolio Value£5,000,000£5,000,000
Net Yield£250,000£250,000
Taxable profit *assumes £2.5m mortgage on properties at c.2% interest£300,000£250,000
Income TaxCorporation Tax
Tax
*assumes additional rate taxpayer
£135,00045%£47,50019%
Net earnings£115,000£202,500
Cash benefit as a Limited Company£87,500

In the event that all the profits are taken out of the company as dividends:

LLP or partnershipLimited Company
Income TaxCorporation Tax
Dividend tax£77,15338.10%
Net cash£115,000£125,348
2.30%2.51%
Cash benefit as a Limited Company is still higher£10,348

Capital gains tax treatment when transferring real property into a limited company

Capital gains tax (CGT) is levied when an asset which has gained in value is disposed of. When transferring a property from an individual’s ownership into a limited company with essentially the same ultimate owner you might expect an exemption to exist to allow for this change in business structure.

If a current business has property in it, you might consider moving these properties into a limited company in order to benefit from the lower tax rates and less tax restrictions. Unfortunately, if you do so then the transfer and change of ownership will be deemed as a disposal and a new acquisition at the current market value. However, there is an incorporation relief available, under specific conditions, that will allow the gain to be deferred, rolled into the base cost of the shares and in exchange for the properties themselves. This is a deferral and not an exemption.

One of the conditions is that all the properties of the current trade, being the rental business, are transferred into the limited company. This could trigger taxes due to complexities with the current tenant or family relationships with the properties.

One other condition is that the business needs to be classed as a trading business and not simply as an investment business. Under case law in the case of Ramsay v HMRC (2013) the amount of time spent on the business to allow it to be considered a trade is 20 hours per week. Therefore, the larger the portfolio where the owners undertake most of the management and other activities it will be easier to argue this criterion is met. Similarly, where a smaller portfolio is held, and the majority of the activities have been redeveloping the property over several months or years which involved the owners themselves then you have a better chance of meeting this criterion.

Importantly, all of the current debt on the properties need to be novated on transfer into the limited company and not just repaid with new debt otherwise the relief is not permitted.

When the net asset value of the property business is less than the gain being rolled into the shares then there is a crystallisation of a liability and this will trigger an immediate taxable gain on this portion. Therefore, it is important to undertake an independent asset valuation and tax valuation during this process.

God is in the details

Mies van der Rohe (1886-1969), architect

Stamp duty land tax treatment when transferring real property into a limited company

SDLT is levied when a land or property asset is purchased. When transferring a property from your ownership into a limited company this will be deemed a disposal and new purchase. You may believe that since the ultimate owner will still be the same that you might expect an exemption to exist to allow for this change in business structure.

As mentioned above, SDLT will normally be charged on the transfer into a company and also the 3% surcharge will be applicable to most landlords doing so, especially those seeking incorporation relief. The recent reduction in SDLT until 31 March 2020 (unless it will be extended) means that although most property purchases up to £500,000 will no longer pay CGT, saving £15,000 at that valuation or higher, additional property purchases will still pay the 3% surcharge from the first pound as previously.

One exception to SDLT being charged is when transferring property from a trading partnership into a limited company. Under Finance Act 2003 Schedule 13, SDLT will get 100% relief and not be charged but consideration needs to be had about whether the partnership is trading. It will not be possible to move the property from a sole trade into a partnership first and then into a company since the first step would attract SDLT at that point. However, this cost may be acceptable when compared with the overall tax savings that a Corporate Vehicle may achieve. It is important to be able to prove the partnership existed with evidence on tax returns, banking statements, the mortgages and other areas.

For timings considerations, if the partnership itself was exempt from SDLT at the point of its incorporation then there will be a SDLT clawback if you withdraw capital from a partnership within three years of land or property being added to it.

If stamp duty is payable then there is one further relief when incorporating properties into a limited company, called multiple dwellings relief. This relief allows stamp duty to be charged on each property based on the average price of all the properties being transferred as part of a linked transaction. The benefit here is that you are less likely to be paying stamp duty at the higher banding when averaging all the property prices. This relief can be significant but needs careful consideration of the rules to qualify for the relief.

Stamp duty costs calculation

Portfolio value: £5,000,000

Up to 30 June 2021After 30 June 2021
Up to £500,0003%Up to £125,0003%
£500,001 - £925,0008%£125,001 - £250,0005%
£925,001 - £1.5m13%£250,001 - £925,0008%
Over £1.5m15%£925,001 - £1.5m13%
Over £1.5m15%
Total Stamp£648,000£663,750

** 3% surcharge has been applied to all bands since more than one property is owned.

Stamp duty can be much lower if the portfolio qualifies for multiple dwellings relief which calculates stamp duty based on the average sales price of all the properties.

In which case and asssuming that the portfolio of £5m consists of 10 properties averaging £500,000 each, stamp duty would therefore be:

Up to 30 June 2021After 30 June 2021
Up to £500,0003%Up to £125,0003%
£500,001 - £925,0008%£125,001 - £250,0005%
£925,001 - £1.5m13%£250,001 - £925,0008%
Over £1.5m15%£925,001 - £1.5m13%
Over £1.5m15%
Total Stamp£150,000£300,000
1.713.43

In the circumstances above, the stamp duty would be repaid within two years, or three and a half years, after incoporating the business into a company.

Type of partnership

There are two types of partnerships available. One as an unincorporated partnership and one as incorporated called a limited liability partnership (LLP). Using a “simple” partnership rather than an LLP could prove useful in allocating property profits in the most beneficial way to ensure that each individual’s tax status is fully utilised.

Mortgage lenders do not need to be informed about the formation of a simple partnership (unlike where beneficial interest in a personally mortgaged property is transferred to a company) and so using a simple partnership can enable many landlords to significantly reduce the tax exposure to section 24 mortgage interest relief restrictions.

Other considerations

As well as the provisions mentioned above in the different scenarios, you will need a company incorporated, new bank accounts, and the administrative change of ownership of the properties, including an aligned finance provider, change any deposit accounts over to the new company, notify the tenants and sign new tenant agreements and new insurance in place.

You will also need to consider the impact of any reorganisation on business continuity and succession planning with a view to potential Inheritance Tax mitigation. If planned well at the earliest stage many taxes can be avoided.

Ongoing compliance for a limited company owning residential property includes filing an annual ATED return to confirm that the property, if over £500,000, is being used for commercial purposes and not being left empty. Otherwise, you have to pay an ATED charge.

We have a team of accountants, tax advisors, solicitors, specialist finance providers able to assess your situation and manage the process through to completion.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Gary Green or write to us using the contact form below.

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