Should you incorporate your property portfolio into a limited company?
Since 1st April 2017, the government has slowly phased in Section 24 income tax relief restrictions on landlords and property investors. This restricts the government from being able to deduct finance costs (i.e mortgage interest) on their taxable profit calculation for residential property owned.
|Tax Year||Deductible % of finance costs|
|2017 to 2018||75%|
|2018 to 2019||50%|
|2019 to 2020||25%|
|2020 to 2021||0%|
Section 24 will not affect basic rate taxpayers, but if you are a higher rate taxpayer you will pay a lot more tax on your property investment. Also, if you have a salary or self-employed income of circa £30K with mortgage interest costs on your portfolio of circa £20K then you could be moved from being a basic rate taxpayer to a higher rate taxpayer.
Our client had a large portfolio being held in their personal name meaning they were unable to tax efficiently, maximise their personal wealth and fund their lifestyle to the same level they could previously. They enquired if they could transfer their properties to a limited company where finance costs are unrestricted. The answer is yes of course, however, by doing this you should consider the following tax implications:
- Capital Gains Tax on the difference between the current market value and the price you paid for your property.
- Stamp Duty Land Tax costs (SDLT) costs that will be incurred by transferring the properties into a limited company.
- Annual Tax on Enveloped Dwellings (ATED).
Capital Gains Tax Mitigation
Our client asked if they could transfer the property to the company for £0. However they would be deemed to have transferred the property at market value.
Williamson & Croft’s tax team advised that provided the relevant criteria are met, there is a relief available on incorporation that enables the gain to be deferred and rolled into the base cost of the shares issued in exchange for the properties.
The added advantage is that the base costs of the properties themselves are uplifted tax free to market value on transfer into the company, thereby reducing any future CGT charge on a later disposal of those properties by the company. This process generally takes 3 years to complete.
Stamp Duty Land Tax
Another important consideration for our client was SDLT. For SDLT purposes, the transfer of the portfolio to a company will be deemed to take place at market value and a tax charge will arise on that value regardless of whether any actual consideration is received.
However, where the properties are held in a partnership it may be possible to transfer them without giving rise to an SDLT charge at all. This is due to the way the rules work when calculating the SDLT on transfers of land to a company where all parties to the transaction are connected. There are strict anti-avoidance provisions to deal with so it is vital that full tax advice and risk assessment is carried out.
Annual Tax on Enveloped Dwellings
Companies are subject to the Annual Tax on Enveloped Dwellings (ATED) charge where residential property is held within a corporate structure and the value of the property is more than £500,000. In this scenario, none of our clients’ properties were individually valued at more than £500,000 so we had no exposure to ATED.
Our client was then able to continue to run their property business as a limited company without the impact of Section 24 meaning they were able to tax-efficiently maximise their personal wealth and fund their lifestyle to their desired level.
Looking for further information on property incorporation and are located in Manchester, Liverpool and the surrounding areas including Warrington, Stockport, Birkenhead or Runcorn? Then please feel free to contact our offices on 0161 399 0121 / 0151 303 3112 or by email firstname.lastname@example.org