Transferring Property into a Limited Company – Tax Considerations

If you’re a property owner, get a grip on the tax implications of incorporating your residential property business and transferring your property into a limited company.

While it might seem daunting, mastering these specific tips is key to unlocking potential tax benefits. Keep reading to harness tax advantages in your property business.

transferring property into a limited company

(Read Time: Approx. 5 minutes)

Topics Discussed:

  • Examining Capital Gains Tax (CGT) and Corporation Tax implications during property business incorporation.

  • Exploring the details of Stamp Duty Land Tax (SDLT) and potential reliefs, particularly in the context of partnerships and corporate transactions.


Capital Gains Tax (CGT) Considerations

Incorporating a residential property business involves transferring land and property, which triggers CGT.

This tax is calculated based on the Market Value (MV) of each asset, irrespective of the actual consideration paid.

When it comes to CGT rates, the transfer attracts CGT at residential rates. This means 18% or 28% for higher rate taxpayers.

Notably, the reduced rates of 10% and 20%, which are typically available, do not apply to UK residential property.

In terms of incorporation relief, Section 162 of the Taxation of Chargeable Gains Act 1992 allows for holdover relief on gains made during incorporation.

However, this relief has its limitations, particularly if the transfer involves any cash consideration or non-business assets.

It’s important to note that Business Asset Disposal Relief (BADR) and Section 165 Holdover (Gift) Relief are not applicable for the incorporation of ordinary rental properties.


Corporation Tax Changes

Following April 2023, Corporation Tax rates have changed:

• Companies with profits below £50,000 now pay tax at 19%, the Small Profits Rate (SPR).

• Companies with profits between £50,000 and £250,000 are benefitting from marginal relief at a 25% tax rate.

• The SPR doesn’t apply to Close Investment Holding Companies.

• Any further changes to corporation tax will be reported on our website as soon as we learn of it.


Stamp Duty Land Tax Implications

The process of transferring property to a company involves considerations for Stamp Duty Land Tax (SDLT).

Under standard SDLT rules, tax is due on property transfers to a company if the market value exceeds the residential property SDLT threshold.

For companies, a 3% SDLT surcharge applies to all property purchases, calculated on the market value, and this holds true even for transactions involving shares.

If the property business was operated by a partnership, SDLT relief might be available under the ‘sum of the lower proportions’ rule.

However, it’s important to understand that simply jointly owning property does not constitute a valid partnership for these purposes.


Tax Planning Prior to Incorporation

Strategic planning a year before incorporating can greatly optimise tax implications.

One effective strategy might be transferring property into joint names or forming a partnership before incorporation.

It’s recommended to operate this partnership genuinely as a business for at least two years prior to incorporation, especially to qualify for SDLT relief.


Annual Tax on Enveloped Dwellings

After incorporation, companies need to be mindful of the Annual Tax on Enveloped Dwellings (ATED), which is particularly relevant if the property’s value exceeds £500,000.

However, there are exemptions available for properties acquired for a letting business.


VAT Considerations

While VAT implications are generally unlikely for residential property businesses, specific situations such as mixed-use properties require careful consideration.


Capital Allowances and Business Liabilities

Regarding dwelling houses, capital allowances are generally not applicable.

Additionally, it’s important to note that business liabilities like mortgages cannot be transferred without the lender’s consent.


Key Considerations:

CGT Implications: Capital gains on property transfers are taxed at residential rates, with specific reliefs available under certain conditions.

Corporation Tax Rates: Understanding the new tax rates and their applicability is essential for effective planning.

SDLT Considerations: Comprehensive understanding of SDLT rules, including potential reliefs and surcharges, is vital.

Partnership Transfers: Proper structuring of partnership businesses before incorporation can provide SDLT benefits.

ATED Responsibilities: Companies must be aware of ATED requirements and exemptions.

VAT and Capital Allowances: Limited applicability but crucial in certain scenarios.


Summary

Embarking on the incorporation of a residential property business brings significant tax considerations.

Understanding the essentials of property-related taxation is key.

To ensure you’re proceeding with the utmost expertise and achieving maximum tax efficiency, it’s vital to seek professional advice.

Reach out to our team now. With years of specialised experience in property tax, we are the definitive experts you need to guide you through this crucial process.


Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.

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Kind regards,

Ilyas Patel