One of the common questions property owners are always asked is if it is possible to transfer a personal property portfolio into a limited company. Because it is getting popular with landlords. If that’s you, you are in the right spot. Let’s talk about how it’s done and the rules to follow. Switching property ownership from your name to a limited company can have big taxes and significant financial changes.
In this blog post, we will let you know how transferring a property portfolio from personal ownership to another ownership limited company thing works, and tax considerations, including strategies to avoid Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) as well. We’ll break down how the Ramsay vs HMRC case plays a role in this process. Besides, we’ll touch on the relevant sections of the Finance Act and provide insights into the advantages or disadvantages it can bring.
Transferring Personal Property to a Limited Company
First things first, if you’ve got property in your name maybe a house you used to live in one you’ve inherited, or even part of a rental portfolio. You might think about moving it to a limited company surely. However, there are tax advantages, but it is important to seek a piece of advice from a tax professional first to avoid any traps.
Remember, limited companies are like separate beings from the people running them. They follow different tax rules which might mean lower taxes than for individual owners. But be careful, Moving property could bring hefty tax bills if not handled properly
Key Tax Considerations When Transferring Property to a Limited Company
When switching ownership into a limited company, these taxes come into play:
- Corporation Tax
- Income Tax
- Stamp Duty Land Tax (SDLT)
- Capital Gains Tax (CGT)
- Inheritance Tax (IHT)
Okay, let’s break those down a bit more.
Benefits of property transfer into a limited company
- Corporation Tax vs Personal Income Tax:
One big win in transferring property to a limited company is rental income gets taxed at corporate rates which can be lower than personal rates. Corporation tax rates range from 19% to 25% depending on profits. That’s often better than personal income tax rates that start at 20% and go up to 45%. Owning property through a company can reduce their tax burden overall.
- Tax-Efficient Profit Extraction:
You can save on personal taxes when pulling money out of the company by adding family as shareholders or directors using their lower tax bands & allowances. Additionally, profits kept in the company can be reinvested, used to purchase more properties, or saved for later use for future company growth. Use these funds for dividends or contribute to directors’ pensions later on.
- Deductions for Expenses:
Another plus of holding property in a limited company is you can deduct expenses like management fees, property maintenance, and mortgage interest from rental income, specifically reducing taxable profits.
- Mortgage Interest Deduction:
One of the biggest financial incentives for landlords to move their property portfolios into a limited company is deducting all mortgage interest. Since Section 24 of the Finance Act, came in, individuals can’t fully offset mortgage interest against rent but companies still can. This is great news for landlords with lots of mortgage debt.
Though not all lenders let you move properties with existing mortgages so it’s essential to check with your lender before making any moves.
- Growing Your Portfolio:
Banks often feel better lending money when businesses own them. Therefore, financing gets easier allowing adding new properties without much hassle unlike individuals who face higher rates, and harder terms, routinely imposed on newer or independent investors.
- Inheritance Tax (IHT):
Owning property through a limited company gives some room for Inheritance Taxes. When you hold shares in a company rather than directly owning property, there may be strategies to reduce IHT liability, like Family Investment Companies or loans which could help cut down IHT over time.
- Limited Liability:
Of course, one major incentive of a limited company is Limited liability. If things get challenging business-wise, your assets usually stay safe unless you’ve given personal debt guarantees like mortgages. Hence this separation protects your peace of mind especially where risks run high like in property markets.
Disadvantages of Transferring Property to a Limited Company
While there are many benefits to transferring a property portfolio to a limited company, there are also some downsides.
- Change in Ownership:
When you transfer property to a company, you won’t own them directly anymore. Instead, you’ll hold shares which means dealing with commercial mortgages often pricier than personal ones along with higher interests & also other charges.
- Higher Mortgage Costs:
Commercial mortgages come up here again. They tend costlier than individual ones bringing higher interest rates & setup fees. Moreover, you may incur early repayment charges if you need to exit a personal mortgage before transferring the property.
- Stamp Duty Land Tax:
Another potential drawback is Stamp Duty Land Tax (SDLT). When transferring a property into a limited company, you have to pay SDLT based on current market value. Consequently, you have to face financial outlay, quite heavily initially. Specifically, it may affect bigger portfolios that are significantly appreciated over time.
When thinking about shifting properties into limited companies, requires weighing both pros and cons carefully. Further, discussion with experts ensures smooth sailing ahead.
- Additional Administrative and Accountancy Costs:
Running a limited company means more paperwork and costs than owning property in your name. You’ll need to file yearly accounts with Companies House, do corporation tax returns, and comply with company law requirements. Most landlords will also need an accountant for this task, which might mean more costs.
Avoiding Capital Gains Tax (CGT) with Incorporation Relief
One big thing when moving property to a company is capital gain tax CGT. If your properties are worth more now since you acquired them, switching your portfolio into a limited company could trigger a CGT liability on those gains made.
But guess what? There’s something called Incorporation Relief in Section 162 of the Taxation of Chargeable Gains Act 1992 that might help you escape this tax. This relief lets you push off paying CGT when shifting a business (like property) into a limited company. Instead of paying the tax upfront, the gain is ‘held over’ until the company sells the property.
To qualify for Incorporation Relief, you must meet specific conditions:
- You must be transferring an actual business, not just single properties.
- The business needs to be actively managed – like dealing with tenants or fixing things up.
- The whole business must be moved as an ongoing concern to the limited company.
HMRC typically requires that the properties must be managed as part of an active business not just passive investments. Generally, HMRC expects around 20 hours of weekly management for it to count as an active business. If you meet these rules, Incorporation Relief can be super helpful since it moves that CGT bill way down the road – letting you stick money back into your business instead.
The Ramsay vs HMRC Case
The Ramsay vs HMRC case is famous for the legal battle that sheds on light how Incorporation Relief works in real life. In this case, The Ramsay had shifted their property portfolio into a limited company and claimed Incorporation Relief to avoid CGT.
HMRC argued they weren’t running an actual “business” under Section 162 because it seemed more like passive investing. But the Ramsay family proved they were managing the properties, like dealing with tenants & handling maintenance issues. Hence they secured their relief.
This case matters if you’re thinking about transferring your portfolio because it shows that you’re doing real active work. Thus, it makes all the difference in getting that tax break.
Finance Act and Stamp Duty Land Tax (SDLT) – Avoiding Stamp Duty via Partnership
Stamp Duty Land Tax (SDLT) is another tax worry when transferring properties to a limited company. Transferring property portfolios could mean paying stamp duty land tax (SDLT) based on the market value of the properties and how much they are worth now.
Yet there are other ways around reducing this tax hit if the portfolio is owned through a partnership. Section 75 of the Finance Act 2003 outlines how using partnerships can help avoid big SDLT bills before moving properties to a limited company.
Here’s how it works:
- Create a partnership & and transfer the property portfolio into it.
- After a set period, dissolve the partnership & transfer everything to your company without facing huge SDLT charges.
There are strict requirements and a certain degree of risk involved, but when done correctly, this strategy can lead to significant SDLT savings.
It’s essential to seek expert tax advice before pursuing this route, as HMRC closely examines such transactions. If HMRC believes the structure is artificial or done purely to avoid tax, they may challenge the SDLT exemption.
Conclusion:
Transferring your property portfolio from your name to a limited company has some big advantages. Especially in terms of tax efficiency and long-term planning. Incorporation Relief that helps avoid hefty Capital Gains Tax bills & using partnerships might cut down Stamp Duty Land Tax as well.
However, there are extra costs & admin work plus potential big-tax headaches ahead like we saw in the Ramsay vs HMRC case which demonstrates how important it is to ensure your property activities qualify as a business for tax relief purposes.
Whether moving your properties into a limited company is right is the right decision. Hence it will depend on your circumstances. It is important to consult with a good tax advisor or accountant before making any moves since rules around Incorporation Relief, SDLT & corporation taxes can change. Besides they can also be challenging.
By carefully checking out all the pros and cons involved. You’ll be able to make smart decisions lined up well with long-term financial goals.
