Advantages of incorporating your portfolio to a Limited company

When Section 24 was phased in from 2017 over the last 4 years, landlords have been having to decide how to manage their property portfolios to reduce the tax liabilities.  Section 24 was introduced so landlords will no longer be able to claim mortgage interest, or any other property finance, as tax-deductible.

Section 24 does not affect a Limited company so there is an option to transfer your rental property portfolio to a Limited company to use the tax reliefs that are available.

When you incorporate your portfolio into a Limited company you become two separate entities, unlike when you are a sole trader and you are personally liable for your properties, you are now a Director or shareholder of your property’s company.  You are also protecting your own personal wealth and possessions by doing this.

With a Limited company, you also pay 19% corporation tax on any profits and you do not have to pay tax on any profit that is not taken out of your company whereas a sole trader would still have to pay tax on a profit that hasn’t even been passed to your personal self.

If you were a basic-rate taxpayer under the £50,000 per year threshold but your rental income from your portfolio pushed you way over the basic-rate tax bracket then you would be wise to incorporate your properties.  If you were a basic-rate taxpayer and you had rental income and were not going over the high-rate taxpayer bracket then you would probably not need to do this.

Property losses

If you had property losses for this year then you should declare them in your yearly tax returns and then think about incorporating them into a Limited company the next year.

Stamp Duty Land Tax when incorporating properties

If you are in a partnership before incorporating to a Limited company then you do not have to pay Stamp Duty Land Tax (SDLT) but if you are a sole-trader then you do have to pay SDLT so if you have a high value of properties, and a sole trader, it may be to your benefit using the Multiple Dwellings Relief.  If you stay as a sole trader and have 6 or more properties then you could also be eligible for commercial rates of SDLT which could also be lower depending on the value of your properties.

You could ‘gift’ shares or ownership to your spouse to start a partnership and after 3 years you could think about transferring to a Limited company if it is the right move for yourself.

 

Capital Gains Tax when incorporating properties

There are CGT issues to review before incorporating your properties to determine whether this structure is economically viable for you.

When transferring properties from a sole trader or partnership to a Limited company there will be CGT to pay.  There could be an ‘incorporation relief’ under ‘section 162’ that requires that the business owner transfers to a company a business but you would have to prove that you are running a rental property portfolio as a business.  You would need to prove you are working at least 20 hours per week on your portfolio to be entitled to this exemption. This is highlighted in the case ‘Ramsey v HMRC’.  If you can prove you are eligible for ‘incorporation relief’ then you may not have to pay any CGT.

Generally, when buying a property at base cost and selling the property at market value as a sole trader or partnership you will have to pay CGT on the profit made but if you move your properties to a Limited company the base cost will increase.  So, any properties disposed of in the future will have a reduction in CGT. 

 

Disadvantages of incorporating your portfolio to a Limited company

Transferring your property portfolio to a Limited company is a highly complex process and Tax Advisory UK highly recommends speaking with a Chartered Tax Advisor before deciding if this structure is beneficial to you.

If you decide this is the best structure for you then you have to take into consideration the cost of this process.  This includes having to remortgage all your properties which would incur valuation fees, legal fees and arrangement fees.  There is more complex work for your accountant to do and you could also be paying higher rates of interest.

Contact Tax Advisory UK and we will arrange a meeting with some of the UK’s best Chartered Tax Advisors who will help with your Property Incorporation planning.  Please call 07908 074954.